Forex Daily Wrap: Looking Ahead To UK CPI, US Retail Sales

DAILY EU FX WRAP: USD-index erases entire Asian and European gains amid cautious comments from Japanese PM Advisor, however is granted some reprieve to finish the European session with minor gains.

Overnight, Antipodean currencies came under heavy selling pressure in the wake of poor Chinese trade balance data, which revealed that Chinese trade surplus fell to its smallest in 13 months in CNY terms and a 2yr low in USD terms, with the move further exacerbated by an unwind of the recent carry-trade inspired gains and a weak iron price outlook by UBS.

In today’s session, the USD-index started off the week on the front foot despite a relatively steady open, with support largely stemming from EUR weakness. The move in EUR came amid no fundamental news, however RANsquawk sources did note talk that the Moroccan Central Bank cut their EUR weighting from 80% to 60% and boosted their USD weighting to 40% from 20%. Furthermore, analysts at IFR noted a large order going through in EUR, with real money and leveraged accounts said to have been on the offer. Consequently, the USD-index edged close to the key 100 level, with USD/JPY breaching 120.50 and GBP/USD tumbling below the 1.4600 handle. However, later during the day comments out of Japan led the USD-index to pare back the entire Asian and European morning gains, with the Japanese PM adviser stating that USD/JPY's appropriate level is at 105.00 with 120.00 being too weak for JPY given current levels of purchasing parity. The greenback was provided some reprieve headings towards the European close, which enabled it to hold onto minor gains above the 99 level.

Looking ahead, tomorrow sees UK CPI, with the Y/Y figure expected flat however the lower range of estimates stands at -0.3%. As such, the key measure could fall into deflation territory and see a leg lower in GBP, which has recently been weighed on by political uncertainty. The other main data focus for tomorrow will be US Retail Sales, which is seen by some analysts at the litmus test for US data to bounce back from a dismal Nonfarm Payrolls miss.