By Alex Edwards at UKForex, an international money transfer service.
The USD strengthened across the board for the most part this week. Since the weak US payrolls, economic data from the States has been generally positive. Retail Sales, PPI, Empire State Manufacturing and the Philly Fed Index all printed better than market expectations and GBP/USD fell towards 1.63 through the week. In other news, UK CPI printed slightly weaker than market expectations at 2.0% y/y vs. 2.1%.
It’s now within the BoE’s target and after climbing 80 points ahead of the news, GBP/USD then dropped back from 1.6445 to 1.6400, a case of “buy the rumour, sell the fact”. US CPI came in as expected at 0.3%. It was the strongest reading in six months but it’s still odd that inflation remains so low and is confusing to a number of Fed officials too. It remains one of the US central bank’s main concerns amid a backdrop of improving US economic data.
On Friday, UK retail sales for December printed far better than market forecasts, rising 2.6% vs. expectations for a reading of 0.5%. The risks to GBP/USD heading in to the print were to the downside after a recent run of slightly weak UK data and with cable close to breaking down through support at 1.6300. The print certainly allayed any fears for the UK’s economic outlook, and markets responded by bidding GBP/USD higher. Before long, GBP/USD could be testing another break higher through 1.65.
EUR/USD also fell this week from 1.3685 to a low of 1.3590 as the USD strengthened. The European data docket was thin, with only European CPI worth mentioning – it printed as expected for December at 0.8. There remain concerns over the threat of deflation in the EZ, aired most recently by IMF head Christine Lagarde, who said this week that “if inflation is the genie, then deflation is the ogre that must be fought decisively”.
The Aussie dollar was one of the biggest losers this week after employment data printed a lot weaker than market expectations. Whilst the unemployment rate remained unchanged at 5.8%, payroll numbers in December dropped by 22,600 vs. estimates for a 10,300 gain. AUD/USD gapped lower from .8900 to .8810, this being close to where it finished the week.
Most of the focus next week will be on Europe with German Zew, French and German Manufacturing PMIs. Australian CPI will also be on focus, particularly so following the big sell-off in AUD/USD this week.
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