Week In FX Europe - EUR/GBP Heatmap Color Changes: Blue To Red

 |  Includes: FXB, FXE
by: Dean Popplewell

The EUR/GBP cross trading volumes have surged after the surprisingly strong UK sales data print Friday morning. Immediately after the release volumes were up +211% versus the monthly average. All the action has been with the pound as the 18-member single currency continues to dither near its 2014 range lows. Sentiment for the EUR remains bearish and markets sellers have been cheered by the limited recovery from its lows outright (1.3545-50), even after last week's relatively soft NFP print.

In contrast, the pound has managed to soar after a surprisingly strong UK retail sales headline print of +2.8% m/m (core) in December compared to expectations for a +0.3%. This massive gain, the largest in a decade, has more than managed to offset the downward revisions for November to +0.2% and +0.4% previously. Despite low inflation, the pressure on Governor Carney at the BoE for an early rate hike from the growth/capacity side continues to increase. UK CPI inflation fell to the BoE's +2% target level last month for the first time in four-years. Chancellor Osborne has indicated that he wants to see above-inflation increase in the minimum wage before policy makers contemplate a change.

The strength in the UK sales data came from spending at smaller stores (+8.1%), department stores (+11%) and by purchases online (+21.6%). Numbers like these will have shifted the market bias towards a risk of earlier tightening ahead of the labor market data next week where the prospect is for the three-month average unemployment rate is to come down to +7.2% from +7.4% on Wednesday.

Speculators were long GBP going into the release (1.6330), but the bullish reaction after the headline remains impressive (1.6437), and technically implies that GBP is reverting to "outperformance." Despite being long pounds, some profit taking has occurred. EUR/GBP repeated failures this week ahead of 0.8350 managed to pare a high percentage of speculative short positions. However, the renewed bullishness about the UK, coupled with rate divergence should have the pound outperforming its mainland competitor. The techies believe that a close below the 100-WMA 0.8303 implies much greater losses. The last similar break saw the EUR/GBP down -10%.