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Euro Bounces From Support As Retail Sales Improves

After testing support at 1.4000 during Asian trading, the Euro would rally over 150 bps aided by an improvement in retail sales.

Talking Points

•    Japanese Yen: Finds Resistance at 20-Day SMA
•    Pound: Falls Consolidating Near Support at 1.4500
•    Euro: Retail Sales Improves
•    US Dollar: Risk Winds To Determine Sentiment

Euro Bounces From Support As Retail Sales Improves

After testing support at 1.4000 during Asian trading, the Euro would rally over 150 bps aided by an improvement in retail sales. The Euro-Zone Retail PMI reading improved to 41.4 from 40.6 led by gains in Germany and Italy. Nevertheless, the reading below 50 signals that sales contracted for the seventh straight month as recession concerns have lead to consumers curbing their spending. The majority of the improvement was due to lower input costs, which will allow stores to continue slashing prices. Indeed, inflation continues to ease in the region with Italian producer prices falling another 1.6% in November, dragging the annualized rate to 2.3% from 5.1%.

Regional German inflation reports also showed continued easing of price pressures with the aggregate reading yet to hit the wires. The ECB will find it hard to argue that its mandate for price stability is preventing them from further easing with the sharp drop in inflation. The question becomes does the central bank believe that it is within their scope of responsibilities to aggressively cut rates in an effort to promote growth similar to the Fed and the BoE. Although, there may be signs of stabilization in Germany- the regions largest economy, the rest of the economic union is headed for a prolonged recession which may lead to leaders demanding more action from the MPC. Until, we get a clear indication of the central bank’s bias, we may see the Euro settle into a trading range between 1.4000 – 1.4500

After setting a fresh 80 month low the Pound has found support trading back above 1.4500. The Sterling briefly broke below its recent trading range of 1.4500-1.5500 and has since consolidated above the psychological level. Technically it looks as if it may trade higher with another test of 1.5500 a possibility. However, interest rate expectations continue to decline and forecasts are that the BoE will cut rates by another 50 bps at their next policy meeting, with some economist calling for 100 bps. The U.K. has lagged the U.S. concerning their housing and financial troubles and monetary policy. Therefore, the central bank may be on a course for a zero interest rate policy which will lead to further pound weakness.

The U.S. economic calendar will provide event risk for he first time in nearly a week with manufacturing, housing and sentiment data on tap. The S&P/ CaseShiller home price index is expected to show property values fell 17.9% in October from a year earlier which would be the lowest since record keeping began in 2001. Meanwhile, the Chicago PMI reading is expected to fall to 33.0, which would be the lowest since 1982. Despite declining home values, and mounting job losses sentiment in the U.S. is expected to improve. Economists are forecasting that consumer confidence rose to 45.5 from 44.9 in December on the back of lower gasoline prices and the anticipation of another fiscal stimulus. The U.S. Treasury's announcement of a $6 billion lifeline for GMAC could ease fears and help send equities higher today. We saw yesterday that the dollar is still correlated with risk appetitive and an improvement in consumer confidence and the aide for GMAC may lead to dollar weakness if equities trade higher. Conversely, the continuation of the worse housing slump since the Great Depression and further contraction in the manufacturing sector may spark risk aversion flows and add to dollar strength.

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