In March, the Confederation of British Industry (CBI) reported a slight increase in its monthly retail sales balance. The indicator for yearly sales showed improvement, rising to +2 from the previous -7, marking an end to a 10-month streak of declines. This stabilization in retail sales offers a glimmer of hope that the sector's downturn may be reaching its lowest point. This news comes after recent official data revealed that British retail sales remained steady in February, defying expectations of a decline. With the current pace of disinflation, reflected in a 1.5% 6-month annualized inflation rate, prospects for a consumer-led recovery in UK GDP growth are improving.
The recent dovish stance taken by the Bank of England (BoE) has bolstered expectations of interest rate cuts starting from June, potentially boosting consumer confidence and spending. Money markets are even factoring in a possibility of a rate cut in May, contributing to the pound's weakness last week as UK gilt yields reached multi-month lows. Today, there are no significant UK data releases, so market sentiment and the strength of the USD are likely to influence the direction of GBP.
Another significant factor weighing on the GBP's strength is its positioning, with the currency being the most overbought among G10 currencies. The 10-year median of net GBP long positions stands at -9.5% of open interest, but currently, these positions are around 23%. Although recent CFTC data indicated a reduction in net GBP long positions from a 17-year high to 53,200 contracts, down from 70,451, there remains a possibility of further unwinding of these long positions in the coming weeks. While a surprise rate cut in May could act as a catalyst, it's not the base case scenario; however, it could potentially drive GBP/USD towards $1.20.
European equity markets kicked off the shorter week with a modestly upbeat tone, continuing a nine-week winning streak. The EUR found support around the $1.0800 mark against the USD, buoyed by a general weakening of the dollar and profit-taking activities ahead of month-end. This occurred despite dovish remarks from a usually hawkish ECB policymaker, which stirred optimism that the central bank of the eurozone might initiate rate cuts in the near future.
Despite yesterday's rebound, the euro remains vulnerable to further weakness in the short term. Although the latest Gfk print for April showed a third consecutive rebound, it fell short of market expectations, dampening the ascent of EUR/USD. Attention now turns to the US durable goods report later today. If there's an upward rebound from last month's print, which marked the most significant monthly decline since April 2020, it could drive EUR/USD below the $1.0800 barrier, testing a 5-week low.
Furthermore, the surprise rate cut by the Swiss National Bank (SNB) last Thursday has raised speculation that the European Central Bank (ECB) will soon follow suit. Given the history of the two central banks mirroring each other, albeit typically with the SNB following the ECB, the markets are anticipating further policy easing in the second quarter. This anticipation is likely to keep a lid on EUR/USD upside potential, and the euro may struggle to advance against the USD without a fresh catalyst.
