– GBP will remain subdued
UK retail sales showed a very disappointing fall in January, though for what appears to be erratic factors. Headline retail sales volumes including fuel sales declined 0.6% in January, with a 0.5% fall in the excluding fuel measure. That was much weaker than the consensus, which had looked for a 0.5% rise. Clearly this figure will not support GBPUSD, a pair that is already very weak. Contrary to our expectations, the GBP has been the clear underperformer in recent weeks; driven by the anticipation of drastic changes in future BoE policy. This has been particularly obvious in measures of UK inflation expectations (see chart) which have spiked along with market’s growing perception that the ‘new’ BoE will be more willing to tolerate higher inflation. We have subsequently revised our EURGBP forecast higher to 0.8500 in Q1 and 0.84 in Q2 However, we are still looking for a EURGBP to fall to 0.7800 by year-end driven by our expectation of far higher growth in the UK than in the eurozone.
– EUR consolidation to continue
EURUSD has seen a moderate bounce after touching a low of 1.3315, while EURJPY has been under some pressure, dipping below 124.00. The catalyst was softer than expected Q4 eurozone GDP (down 0.6% q/q) and a comment from an ECB policymaker (Constancio) that the ECB are technically ready for negative deposit rates. In our view GDP data is ‘old news’ at this point as the recent PMI data have improved notably (although still mildly in contraction territory). As we have been flagging for some time, the near-term bias remains lower for the EUR; lower EUR implied rates (June euribor remains bid and closed above 200-dma), and some uncertainty ahead of the Italian elections (Feb 24/25) are two big factors. Relative equity markets (recent eurozone equity under performance) also provide some negative EUR signals, in contrast to the case last month. But any decline will eventually provide buying opportunities, a move that could be driven by
the Fed coming back into focus as the government spending sequestration restrains economic activity. Our bias is to look for buying opportunities in the 1.3230/50 area for a gain to 1.3800 by the end of Q1.
– G20 poses further downside risks to USDJPY
Markets remain alert to the G7/G20 headlines, while USDJPY has slipped towards the bottom of the 92.50-94.50 range. The draft G20 statement (as reported by the newswires) reaffirmed the pledge to “refrain from competitive devaluation of currencies” – very similar language from the last statement on November 5. However Russia’s FinMin Siluanov who is chairing the meeting said he was pushing for a stronger statement than in the past. We see scope for the final version of the G20 statement to include an indirect reference to Japan (via code words like “advanced countries”), similar to the language used in the last impactful G20 message on FX back in 2010. This could trigger some further profit taking on short-JPY positioning. However we still see a bias to buy USDJPY on dips amid the “dove contest” of sorts between the BoJ Governor candidates. Some reports have suggested that the two front-runners for the job are ex-BoJ Deputy Governors Toshiro Muto and Kazumasa Iwata. The latter is probably the most dovish of the potential candidates discussed, having advocated measures such as foreign bond buying.
BNP Paribas