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The pound sunk nearly 100 pips immediately after the disappointing release of U.K. May retail sales which unexpectedly fell by 0.6%.

Talking Points
• Japanese Yen: Back Below 95.80
• Swiss Franc: SNB Leaves Target Rate Unchanged
• Pound: Retail Sales Unexpectedly Fell
• Euro: German Econ Min Say Recovery By 2010
• US Dollar: Philadelphia Fed On Tap

The Pound Sunk By Unexpected Weak Retail Sales, Supporting Recovery Concerns

The pound sunk nearly 100 pips immediately after the disappointing release of U.K. May retail sales which unexpectedly fell by 0.6%. Early forecasts were looking for a 0.3% gain which would have been a third straight month of improvement, but months of job losses made it difficult for Britons to sustain the level of demand. However, public sector net borrowing rose to £19.8 billion which was the highest since record keeping began in 1993 and a sign credit markets are thawing. The GBP/USD reached as low as 1.6209 before finding support erasing all of its gains from yesterday's trading.

A reversal in consumption at non-food and non-specialized stores which fell by -1.4% and -1.8%, signals that Britons have reigned in non-discretionary spending. Signs of stabilization in the economy had led to gains the past two months but now that the built up demand has been exhausted, future purchases will come under scrutiny. Meanwhile, calls for spending to be curbed by Chancellor of the Exchequer Alistair Darling will put added pressure on Prime Minister Gordon Brown as the government continues to increase its debt in an attempt to spur an economic recovery. Also, BoE Governor King speaking today said that although that there a signs of a recovery, it is too soon to reverse stimulus and liquidity measures, but the time has come to plan an exit strategy. The comments underline the prevailing concern that as soon as we start to see a global recovery, government's efforts to stave of inflation and reverse recent efforts will limit the upside potential for growth. The GBP/USD losses were slowed by the 20-Day SMA at 1.6222, but further weakness could lead to a test of 1.5986- the 6/9 low.

The Euro has seen see saw price action during European trading as bullish sentiment is being challenged by declining equity markets. The EUR/GBP is benefiting from sterling weakness which has propped up the single currency against the dollar. The Italian trade balance was the only fundamental release which showed a deficit of 277 billion euros after a surplus of 69 billion the month prior as exports sharply fell. Despite, signs of stabilization in the economic union there are several countries that are still facing considerable challenges. Indeed, the German economic Ministry June report stated that the contraction is weaker than previously and expects a bottoming by the end of 2009 but downside risk remain high. The 20-Day SMA at 1.4015 may limit upside potential for the EUR/USD which could lead to another re-test of 1.3783- the 38.2% Fibo of 1.2884 -1.4340.

The SNB left its Libor target rate unchanged at 0.25%, as expected and confirmed that it will continue to take firm action to prevent an appreciation of the franc as risks of deflation still remain. The central bank also pledged to continue to provide sufficient liquidity to the market until signs of growth return. The USD/CHF was relatively unchanged despite the commitment to depreciate the franc.

After earlier losses the dollar has regained its footing and is benefiting from increased risk aversion on the back of weak U.K. consumption figures. We may see continued greenback support as markets start to come to the reality that any recovery will be prolonged and challenging. On the US economic docket we will see focus on the upcoming initial jobless claims figures as traders look for signs that the labor market is improving. Forecasts are for new filings to remain level at 602k after 601k the month prior as the pace of layoffs has slowed. A drop below the 600K level could spark an improvement in risk sentiment and weigh on the dollar. Additionally, the Philadelphia Fed manufacturing reading is forecasted to improve to -17.0 from -22.6 which would be the highest since September, 2008. Canadian CPI out ahead of the U.S. releases will also provide volatility for the loonie pairs as forecasts are for a drop to -0.2% which could encourage the BoC to institute quantitative easing measures.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com