FX round-up: Pound, US dollar find slight safe haven bid at end of the week

Friday saw the pound weaken a tad against the dollar but flirt closer to the 1.2 euro level that has been playing hard to get since June, with the single currency also on the backfoot against the greenback although it too ended higher for the week.

The pound weakened 0.13% against the dollar to slide back just below 1.28 after two days above that mark this week, with a disappointing set of UK retail sales figures for March robbing it of its mojo. Cable was off by 0.11% to 1.2799 as of 1934 GMT.

However, Sterling maintained its footing versus the euro ahead of the French elections on Sunday and was at 1.1964, albeit down by 0.25% to 139.73 versus the yen.

The greenback was also higher before the first round of voting in the French elections on Sunday, with the spot US dollar index edging higher by 0.16% to 99.94, although that was still below the 100.51 mark at which ended the previous week.

Retail sales volumes in the UK dropped by 1.8% month-on-month in March, missing economists' forecasts for a fall of 0.5% by a wide margin.

"It’s been a disappointing end to a very positive week for the pound after March retail sales slid 1.8%, much more than expected rounding off a disappointing quarter for the UK consumer. With Q1 GDP coming up next week, this consumer data would suggest that the services sector that has helped drive the economy since the Brexit vote, could well temper expectations around next week’s numbers," said Michael Hewson, chief market analyst at CMC Markets.

Nonetheless, having on Tuesday turned neutral on the pound, strategists at Deutsche Bank revised up their GBP/USD cycle end-point from its previous low of 1.06 in 2018, expecting cable to reach 1.30 by the end of the second quarter of this year, before falling to 1.24 in the third and 1.20 by the end of the year and then hitting a low of 1.14 in 2018, followed by a rebound to 1.38 in 2019.

"This returns it to levels after the Brexit vote, but before PM May's 'hard Brexit' Birmingham Party Conference Speech. This is consistent with a reduction of crash risk, but we still anticipate sterling underperformance against the dollar based on monetary divergence and a weak external balance."

As for EUR/GBP, Deutsche sees it largely unchanged from present levels until 2019, reflecting a view of "broadly balanced risks" for the UK and the euro area over the next two years.

The pound is the best performing G10 currency on a one-month view followed by the yen, which has benefited from haven flows but lost ground this week after Bank of Japan Governor Haruhiko Kuroda shot down any notion that the central bank might be any less committed to its current easing policy.

Expecting the dollar to endure a broad-based softening this year as expectations of reflation in the US decline, Rabobank's Jane Foley said that without upside pressure in the USD, the BoJ's hugely accommodative monetary policy "will have less power to push USD/JPY higher and will therefore have less overall market impact".

Yesterday's remarks "should counter fears that the BoJ may contemplate tapering this year; the JPY did soften in reaction to the statement", Foley said, but acknowledged that discussions about BoJ tapering are in part a function a concern that the central bank could run into supply constraints, which are "unlikely to completely dissipate".

She sees a strong risk that the yen will remain "very well supported this year" versus the dollar.