China data comes in better than expected, UK retail sales in focus

After yesterday’s positive US housing and jobs data saw the S&P500 close at another five year high investors appear to be shrugging off concerns about America’s political dysfunction and appear to be happy to focus on the underlying economy for now, which appears to be ticking over quite nicely, albeit patchily.

This afternoon’s University of Michigan confidence number could take the edge off further upside ahead of the long weekend in the US if as expected it slips back due to the brinksmanship of the fiscal cliff shenanigans at the end of last year.

Analysts appear to be dismissing this possibility with predications of a rise to 75 from the previous 72.9, but don’t be surprised if it falls short.

This morning’s Chinese data is unlikely to undermine the underlying positive investment tone coming in better than expected across the board, though early indications do suggest that Europe’s markets may struggle to push drastically higher given their proximity to multi year highs .

Starting off with the Q4 GDP numbers we saw a better than expected rise from 7.4% in Q3 to 7.9%, while industrial production for December came in at 10.3%, up from 10.1% and better than the 10.2% expected.

Retail sales also came in better which is particularly significant given that they have become a much more important number now given the recession in Europe, and China’s problems with Japan.
Given these factors, China will have to rely much less on its surplus in trade to Europe and other countries for GDP growth, this fall off in demand will need to be offset domestically by demand at home, otherwise we could see the GDP numbers in subsequent quarters start to slip back again.

With that in mind if China is to continue to grow at its current pace these numbers need to continue to rise to replace this drop in overseas demand and this morning’s December number also appears to be going in the right direction rising from 14.9% to 15.2%, also better than the expected 15.1%.

The past two weeks have seen both the good and bad on the UK High Street as retailers digest their numbers from the pre-Christmas trading period with some household names having to call time and go into administration, while other retailers have beaten expectations and performed much better than expected.

As such the latest December retail sales numbers will be particularly important as they could well give clues as to how well the UK economy performed when the final Q4 GDP numbers come together. While next week’s initial GDP numbers will give an early indication they won’t be that reflective of the final number.

The latest retail sales numbers are particularly important given how poor this particular quarter has been so far with a net decline so far of -0.8% for October and November. No-one is expecting December’s numbers to reverse that decline entirely; however there is a hope that a rise of 0.3% could well see the annualised number stay at 1%, which for an economy that is flat lining isn’t too shabby.

EURUSD – the 1.3400 level continues to cap the upside where we have the 100 day MA.
The key level remains at the 1.3500 level a break of which targets 1.3835, the 61.8% retracement of the 1.4940/1.2045 down move. a failure to break 1.3400 suggests further consolidation back towards 1.3250.
The long term support line from the 1.2045 lows now at 1.3035 remains the key level on the downside.

GBPUSD – the pound continues to look weak pushing further below the 1.6000 level yesterday as it pushes nearer to the 200 day MA at 1.5910. This remains the key level though we’ve yet to close below the major trend line support now at 1.5970 from the 1.5270 lows.
The pound needs to push back through 1.6050 to retarget 1.6130.
The key resistance remains at the 1.6180 level, a break of which retargets the resistance at 1.6310.

EURGBP – the break above 0.8325 skewered the lower euro scenario pushing the single currency to 10 month highs against the pound as we look to close in the 0.8420 level, which is a 50% retracement of the down move from 0.9085 to the lows at 0.7755. The 0.8325 level should now act as support on any pullbacks.
Long term trend line support at 0.8100 comes in from the 0.7755 lows.

USDJPY – another new high, this time at 90.15, as the yen continues to weaken, closing in on 90.35, 76.4% of 95.00/75.30 move. Key support now lies at Thursday’s low at 87.80, with a break below 87.50 targeting 85.00.
The long term target stays at the 94.00 level; however current momentum continues to look rather stretched.