Euro Consolidates After Inline Inflation Data

Talking Points

• Japanese Yen: Labor Cash Earnings Fall For First Time In Year
• Australian Dollar: Retail Sales Fall The Most In Six Years
• Euro: Inflation And Labor Picture Worsen
• British Pound: Confidence and House Prices Continue to Fall
• US Dollar: GDP on tap

After gaining on a dour IMF report on the U.S. economy, inline inflation data and a weakening labor market would temporarily weigh the Euro lower before consolidating. The Eurozone CPI-estimate rose to 4.1% from 4.0% in June as oil reached a record high during the month. Prices have now risen to more than double the ECB target and the highest level in more than 16 years. Meanwhile, the region showed further evidence of weakening as the unemployment rate ticked higher in June to 7.3% from 73.2 the month prior. Nevertheless, the EURUSD has risen back above the 1.560 handle as momentum from yesterday's rise in oil prices saw the pair bounce from a month low of 1.5522.

The IMF claimed that the dollar was overvalued at current levels but has moved closer to equilibrium and inline with existing fundamentals. The international agency described the current economic status of the U.S. as moving in unchartered waters and is likely to underperform into the middle of 2009. Despite rising inflation concerns, the IMF recommends that the Fed not hike rates as the country still faces difficult times ahead with the housing market and credit turmoil persisting.

The fundamental picture continues to deteriorate in Europe as the weakening labor data comes on the heels of yesterday's weak retail and confidence numbers, which may lead to the ECB keeping rates on hold at next week's policy meeting. However, President's Trichet has been staunch in adhering to his price stability mandate and prices 2.1% above the central bank's target leaves the possibility that further tightening lies ahead.

Meanwhile in Australia, the release of the trade and consumer consumption reports painted conflicting pictures for the economy. The country saw its trade balance turn to a surplus as exports rose 2% from May on higher demand for coal and meat products. However, declining imports underlined the weakening domestic demand which was evident with retail sales falling to a six year low of 0.1% in June. 12-year high interest rates have weighed on consumers and may lead to the RBA cutting rate before the end of the year.

The U.S. calendar today may put an end to recession talk as U.S. 2Q GDP is expected to show growth of 2.0% after consecutive quarters of 1.0% and lower. Although the majority of the gain will come as a result of the fiscal stimulus plan, any improvement above the 1% infusion by the government will be seen as a dollar positive. However, if growth stagnates then the outlook for the next few quarters will be significantly reduced absent the benefit of further stimulus, which could send the EURUSD above to test 1.5750.

DailyFX

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