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Euro Consolidates as Economy expectedly Falls Into Recession, Will U.S. Retail Sales Spark Volatility?

The Euro actually found support after the Euro-zone 3Q GDP figures revealed that the region’s economy had entered a recession as growth contracted 0.2% for a second quarter.

Talking Points
• Japanese Yen: Consolidating Above 97.00
• Pound: Range Bound Between 1.4800-1.4900
• Euro: Euro-zone Enters Recession
• US Dollar: Trade Balance on Tap

Euro Consolidates as Economy expectedly Falls Into Recession, Will U.S. Retail Sales Spark Volatility?

The Euro actually found support after the Euro-zone 3Q GDP figures revealed that the region’s economy had entered a recession as growth contracted 0.2% for a second quarter. The decline met economist predictions despite France surprising with growth of 0.1% as Germany’s 0.5% drop dragged down the overall region. The region also saw the final reading for consumer prices remain at 3.2% which was a decline from September’s 3.6% reading.

Now that the Euro-zone is clearly in its first recession in 15 years and price pressures are on track to ease below the central bank’s 2% target, there are very little obstacles to prevent the ECB from further easing. Yet, despite the anticipation of several rate cuts by the MPC over the next year the Euro has remained in 1.2500 – 1.300 range which may lead one to think that a short-term bottom may be in place. However, our technical analyst Jamie Saettele warns not to get too bullish on the pair as the current “Euro corrective rally may present a bearish buying opportunity”.

The British pound spent the majority of the overnight session range bound trading between 1.4800 and 1.4900. The Sterling found some support yesterday as a bout of risk appetite that was generated that actions from the G-20 meetings would help the global economy. However, the Pound’s move against the dollar was the weakest which could signal that more losses are on tap as expectations are that the BoE is on pace to cut rates to as low as 1%. Yet, be aware that with the markets decidedly short the Pound any concrete actions from the G-20 meeting could lead to a bout of short covering and Sterling support.

The U.S. economic calendar will present significant event risk with retail sales and U of M consumer confidence on tap. Consumer consumption is expected to have fallen 2.1% in October following a 1.2% pull back the month prior. It would be the largest decline since November, 2001 as Americans are expected to have retrenched due to the credit crisis and a looming recession. The lack of optimism from consumers will be measured in the sentiment reading which is forecasted to drop to 56.2 which would be the lowest reading in nearly 28 years. The combination of the dour fundamental readings will signal that domestic growth in the country may come to a stand still and could lead to equity markets reversing yesterday’s gains. Therefore, we could see some dollar strength as safe-haven flows lend support to the dollar. However, given the longer term impact on the U.S. economy, we may see the greenback’s weakness from yesterday continue.

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Related Articles:

Sharp US Dollar Buying Suggests Reversal Against Euro Imminent
US Dollar Spikes Lower, US Retail Sales Makes Rebound Possible on Friday
Euro-Zone Falls into First Recession in 15 Years, Stoking Bets for Additional Rate Cuts by the ECB

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com