Sterling firmed against dollar- Retail sales Very Disappointed

At Gerard Associates Ltd we continue our daily look at factors affecting markets and currencies allowing some insight into conditions affecting exchange rates.

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Investment market volatility and currency exchange remains a challenge. The global economics are volatile and unprecedented in history. Currency exchange continues to concern expats with UK Pensions, QROPS and now QNUPS (Qualifying non UK Pension schemes).

Sterling firmed against the dollar on Friday, shrugging off poor UK retail sales data as it tracked gains in the euro against the U.S. currency and remained supported by expectations for higher UK interest rates.

Official data showed retail sales fell 0.8% during December, much more sharply than the 0.3% fall forecast in a Reuters poll.

The data highlighted the fragility of the UK economic recovery, just as the government's harsh austerity measures take effect. It had been expected, however, that December's cold weather would hit retail sales, and this dimmed the negative impact on sterling, analysts said.

Traders also said an earlier euro/sterling sell order by a European bank helped temper the pound's losses.

"We have seen sterling adopt a more bid tone of late, primarily due to inflation news and rate hike expectations. Retail sales disappointed massively but they were expected to be bad and can be erratic," said ETX Capital.

"We have settled in to a $1.5850 to $1.6050 range and although there are some whippy moves intraday there is still the underlying bull trend that has been in play since the start of the year, when we were at levels around $1.5400".

Comments from Bank of England policymaker Adam Posen, who said he had not changed his view that spare capacity in the UK would push inflation back below the 2% target, caused the pound to briefly pare gains.

However, Posen -- a known dove on the Monetary Policy Committee who has called for more easing measures -- also conceded in an interview with Bloomberg News he saw risks of inflation from sterling weakness versus the euro.

Sterling was up 0.6% at $1.5998, well above a low of $1.5867 after the retail sales data and helped as the euro rose to a two-month high against the U.S. currency.

The pound hit an eight-week high of $1.6060 earlier this week. Beyond that its next target is the Nov. 16 high of $1.6095, followed by the Nov. 4 high of $1.6300.

The pound dipped against the euro by 0.5% to €1.1723, its weakest since Jan 5th supported by breaks above its 55- and 200-day moving averages in the €1.1815 region.

The euro gained broadly on improving confidence that euro zone countries will receive comprehensive assistance to deal with their debt problems, though it stayed below resistance at its 100-day moving average at around 85.35 pence.

RATE EXPECTATIONS

The pound has been well supported since higher-than-forecast UK inflation data on Tuesday caused investors to bring forward expectations for when the Bank of England will hike rates.

UK interest rate futures have a 25 basis point rise fully priced in by July and a significant risk of a hike as early as May. However, market watchers are wary that a weak economy and harsh austerity measures to come mean a rate hike is not a done deal and some analysts warn sterling's gains may be overdone.

"If we get another negative (retail sales) number, there will be no question that the Bank of England won't tighten in the first quarter this year," said currency strategist at Credit Agricole.

They added that recent strength in the pound due to increased speculation about a Bank of England tightening was not justified, and that he expected the pound to correct lower in the next week.

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