European Session – Dollar mixed ahead of US long weekend; Pound hit by weak retail sales data

Raffi Boyadjian, XM Investment Research Desk
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Risk appetite faded on the week’s last trading day as political uncertainty in Europe and the US weighed on investor sentiment. The US dollar was mixed in today’s European session as it fell against the yen but moved higher against most other majors, in particular the euro and the pound. This made the yen the best performing currency of the day as it benefited from its safe haven status.

The dollar index, which gauges the greenback’s strength against the currencies of six major trading partners to the US, was back up today after two straight days of falls (with the most prominent one yesterday when it fell 0.6%). The index last stood 0.2% firmer at 100.61 in afternoon trading in Europe ahead of the long holiday weekend in the US where markets will be closed on Monday for President’s day. However, the greenback was weaker against the yen as it slipped below the 113 level to touch a one-week low of 112.61 yen.

Traders have had a lot to digest over the past week in terms of placing their dollar positions, as on the one hand Fed Chair Janet Yellen’s comments in Congress on Tuesday sparked optimism about the future of the US economy and on the other hand, the Trump administration was once again giving mixed signals as regards its policies. A March rate hike by the Fed, although still not strongly expected by market participants, is at least being discussed among analysts, and for good reason given the latest upbeat data out of the US (strong CPI, retail sales and housing data) and the positive picture depicted by Yellen. Should a March hike occur against the odds, it is expected to lead to a resumption of the dollar rally.

The euro moved away from yesterday’s one-week highs as it continued to be dogged by the uncertainty of the upcoming French presidential elections. The latest polls in France show National Front leader Marine Le Pen has increased her lead in the polls for the first round of voting. Greece was also on traders’ minds as the indebted nation looks set to miss the February 20 deadline of completing its bailout review before Eurozone finance ministers meet on Monday for a Eurogroup meeting.

The single currency was last trading at 1.0662 dollars, little changed from a week ago but up over 1% from Wednesday’s 5-week low.

The pound meanwhile extended its steady decline since Tuesday with today’s retail sales figures rounding up a week of disappointing data releases out of the UK. Retail sales numbers for January widely missed estimates as the headline figure fell by 0.3% month-on-month instead of rising by 0.9% as expected, adding to December’s big drop. On an annual basis, retail sales volumes were up just 1.5% in January – the slowest since November 2013 and sharply below expectations of 3.4%. Sales were also down over the month when excluding the volatile fuel component, raising fears that British consumers are reining in their spending as the combination of rising high street prices and slower wage growth hurts households’ disposable incomes.

Sterling fell sharply after the data to briefly tumble below 1.24 dollars, but later recovered slightly to around 1.2430 dollars in late European session.

In commodities, gold was on track for a fourth straight session of gains and hit a one-week high of $1243.77 an ounce. Crude oil didn’t fare as well however, as the large supply glut continued to hang over the market even after reports suggesting that OPEC may extend the output cut deal beyond June 2017. WTI oil was last down at $53.18 a barrel, while Brent crude slide to $55.33 a barrel.