Get ready for big swings in currency markets on Friday

The post retail sales rally in the USD did not last as it resumed slide against all major currencies on Thursday. This decline was somewhat surprising given the sell-off in the US stocks and rise in 10-year Treasury, yields which typically coincides with a stronger USD.  However, the pullback was supported by economic data.

While the Philadelphia Fed manufacturing index beat expectations, activity slowed from the previous month. Jobless claims also jumped from 793,000 to 861,000 last week. Building permits rose 10% but this improvement was offset by a drop in housing starts. Ultimately none of these reports are high impact data for USD but they reinforced the lack of demand for the greenback.GBP benefitted the most from USD weakness with GBP/USD traders driving the pair towards 1.40. With no UK data to spark these gains, the move was purely technical.

Friday will be a busy one for forex traders with many market moving economic reports scheduled for release. However the focus will be on other currencies and not USD because the only US release, existing home sales typically does not inspire big moves so instead, USD will take its cue from stocks and yields.

Keep an eye on GBP because the question of whether GBP/USD breaks or fails at 1.40 will be determined by Friday’s UK retail sales and PMI reports. We know from the British retail consortium’s own measure that consumer spending was very weak at the start of the year as they reported the slowest rise since May. Economists are also looking for a significant decline.  Ongoing restrictions should to weaker PMIs even as we look forward to a strong second half recovery.  All of this suggests that the path of least resistance for GBP/USD in the near term should be lower.

Eurozone PMIs are also on the calendar.  Like the UK, ongoing restrictions should mean subdued economic activity. Last week Germany extended its lockdown until 14th March 2021 at the earliest. Although, new virus cases have come down significantly, the government is concerned about how rapidly the UK variant is spreading. The longer restrictions remain in place the longer it will take for the economy to recover. According to the ECB minutes, Eurozone policymakers felt that ample monetary stimulus remained essential. We are still looking for EUR/USD to test 1.20.

 

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