The larger-than-expected drop in U.K. retail sales certainly weighed on the British Pound during the overnight trade, and the sterling may depreciate further in the days ahead as the Bank of England is widely expected to maintain a cautious outlook for the region. Indeed, the slowing recovery in Britain continues to dampen the prospects for a rate hike in 2011, and the central bank may look to support the real economy throughout the remainder of the year as growth and inflation cool. In light of the recent comment from BoE Governor Mervyn King, the MPC looks as though it will preserve its current policy in the second-half of the year, and the central bank head may continue to talk down speculation for higher borrowing costs as he expects inflation to ‘fall back in due course.’
In turn, the BoE meeting minutes due out next week are likely to highlight a balance tone for monetary policy, and the recent decline in the GBP/USD may gather pace in the coming days as interest rate expectations falter. According to Credit Suisse overnight index swaps, investors see borrowing costs in the U.K. increasing by less than 25bp over the next 12-months, and market participants may continue to scale back speculation for a rate hike in the medium-term should the BoE continue to talk down the risk for inflation. As the pound-dollar retraces the rebound from May (1.6061), the pair may make a run at 1.6000 going into the end of the week, but the descending triangle formation certainly warns of an even bigger selloff in the exchange rate as it appears to have carved out a major top during the previous month.
Slowing inflation in Europe paired with the ongoing weakness in the real economy should continue to bear down on the EUR/USD, and the pair looks poised to test 1.4000 over the remainder of the week as currency traders scale back their appetite for risk. At the same time, fears surrounding the sovereign debt crisis may intensify should the EU fail to meet on common ground at the meeting scheduled for June 19-20, and the EUR/USD may threaten the rebound from back in February as the risk for a Greek default heightens. As European policy makers struggle to restore investor confidence, the shift in risk-taking behavior should gather pace over the near-term, and the European Central Bank may show an increased willingness to delay its exit strategy further as the risk for contagion deepens. In turn, a breach of 1.4000 should expose the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3900, and the single-currency may face additional headwinds in the second-half of the year as the EU struggles to contain the debt crisis.
The U.S. dollar continued to gain ground against its major counterparts, and the greenback should appreciate further during the North American trade as risk aversion grips the financial market. As equity futures foreshadow a lower open for the U.S. market, market participants should continue to scale back their appetite for risk, but positive developments coming out of the world’s largest economy may help to prop up trader sentiment as it reinforces an improved outlook for future growth. A rebound in U.S. housing starts could spur a rebound in risk, but currency traders may show a mixed reaction to the data as building permits are expect to weaken further in May.
Tags: retail sales trade current policy borrowing costs market economy investor
© Copyright 2012, Inc. All rights reserved.