EUR/GBP: Pound to Gain on Expected Rebound in Retail Sales

The Euro is believed to sustain yesterday’s losses alongside the British pound as the Euro area recession deepened more than forecast in its worst performance in almost four years as the bloc’s three largest economies exhibited slumping output. Meanwhile, an estimated rebound in British retail spending in January is believed to prop up the Sterling today.

Gross Domestic Product in the Euro area fell 0.6 percent in the fourth quarter, the most since the first quarter of 2009 and exceeding estimates of a 0.4 percent contraction. The figure capped a series of disappointing reports which showed Germany, France and Italy all shrank more than forecast during the quarter. The German economy, Europe’s powerhouse, shrank by 0.6 percent in the fourth quarter as exports and investment slumped. The French economy, meanwhile, fell 0.3 percent, larger than the 0.2 percent decline estimated by analysts. Italy’s economy shrank by a considerably 0.9 percent, also more than expected.

The bleak economic figures call into question the timing of a recovery that was tipped to begin later this year. Last week, European Central Bank President Mario Draghi expressed that confidence in the 17-nation region has stabilized and that he sees a gradual recovery beginning this year. Nevertheless, analysts say that the outlook for 2013 remains subdued. While a gradual improvement in the global economy is likely to help buttress European exports, domestic demand is seen to remain soft as austerity measures and rising unemployment will take their toll on household consumption. With the outlook for the region likely to remain weak this year, the single currency is apt to decline.

Meanwhile, views that the British economy will likely avoid a triple-dip recession this quarter is apt to receive a boost as the UK ONS is awaited to report that spending inclined in January. Retail sales are foreseen to have gained 0.5 percent last month to offset the 0.1 percent dip registered in December. The figure could provide a positive sign of resilience among Britons despite still bleak economic conditions and the wintry weather. On a more optimistic outlook for the UK economy, a short position favoring the Pound is advised today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.