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UK retail sales may have got a Valentine's Day boost in February

European markets had a disappointing day yesterday with the FTSE 100 getting hit particularly hard as some of its big-cap companies got clobbered on the back of some ex-dividends and weakness in banks and energy stocks.

US markets on the other hand finished the day higher led by the Nasdaq 100, as a sharp slide in US 2-year yields helped to underpin a strong session in a reversal of the declines the day before.

Equity markets on both sides of the Atlantic have experienced a great deal of chop this past few days as investors look for clues as to where we go next when it comes to an overall sense of direction.

Over the past week, we’ve seen central banks raise rates again. However, there appears to be a sense that we may well have seen or be close to the peaks when it comes to the rate hiking cycle. This is being reflected in sharp declines in short-term yields, however, markets also appear to be pricing in the prospect of rate cuts this year. This seems somewhat premature and something that stock markets have yet to price.

Despite the positive finish on Wall Street, European markets look set to lose out with a negative open, as US markets start to come back into favour.

Did UK retail sales increase in February?

Earlier this week UK inflation in February unexpectedly jumped higher, driven by big increases in food prices, as well as by sharp rises in restaurant and other hospitality bills. With food price inflation jumping to over 18%, today’s February retail sales numbers could well get a similar Valentine's Day boost, albeit in fairly selective areas.

One thing that has been notable so far this year is that while consumers have shown a willingness to spend money, they’ve been particularly selective when it comes to the types of items they choose to allocate their cash to.

In January retail sales posted a surprise increase of 0.5%, which confounded expectations of a -0.3% decline. Today’s February numbers could well benefit from a Valentine's Day pick-up as well as increased demand for holiday bookings. In recent company updates airlines have indicated there has been decent demand for seats as well as holiday packages which could also help on the margin. Market expectations are for a gain of 0.2%, however, bearing in mind that January missed expectations by so much it wouldn’t surprise if February came with a surprise miss as well.

We’ll also be getting the latest insight into economic activity for March in France, Germany, and the UK in the form of the latest manufacturing and services flash PMIs.

Over the past few months, there has been increasing evidence of divergence between France and Germany when it comes to economic activity in that the French economy appears to be slowing, while German economic activity is picking up slowly albeit from a low base.

Economic unrest in France could well make itself felt in the latest manufacturing and services PMIs with expectations of 48 and 52.5, respectively.

In Germany, expectations are for modest improvements to 47 for manufacturing and 51 for services.

In the UK the services sector underwent a big rebound in January to 53.5, from 48.7 in December, with the bigger question being whether that recovery can be sustained. Initial estimates suggest yes with a forecast of 53. Manufacturing is expected to improve modestly to 49.7 from 49.3.   

EUR/USD – moved through the 1.0800 area earlier this week and has the potential to retest the recent range highs at 1.1030. Support should now come in at the 1.0760 area, with stronger support at the March lows at 1.0520.

GBP/USD – has struggled to maintain a foothold above 1.2300 pushing up to 1.2343 yesterday. The pound continues to feel vulnerable to slipping back while below the highs for this year at 1.2447. We currently have support at the 1.2170 area, and below that at 1.2020.

EUR/GBP – ran out of steam at 0.8865 yesterday, but still have trend line resistance at the 0.8900 level. Also have strong trend line support at 0.8720, from the lows last August. Support also at 0.8780.

USD/JPY – slipped back towards support at the 130.20 area, with a break below the 130.00 potentially targeting a move towards 128.20. Currently has resistance at 131.20.

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