Euro Stalls As Retail Sales And Confidence Falters, Will A Contraction In U.S. Growth Sink The Dollar?

Talking Points

• Japanese Yen: Resistance At 99.0 Proves Formidable
• Pound: Consolidates Above 1.6550
• Euro: Stalled By Dour Fundamental Data
• US Dollar: GDP On Tap

Euro Stalls As Retail Sales and Confidence Falters, Will A Contraction in U.S. Growth Sink the Dollar?

The Euro's recent bullish momentum was stalled after it reached as high as 1.3300 ending a 900 pip rally, despite German unemployment falling for a fifth straight month as the number of unemployed dropped by 26,000. Yet the lagging indicator was overshadowed by a drop in retail consumption as the Euro-Zone retail PMI dropped to 44.3 from 46.2, as declining confidence has lead to consumers curbing their spending. Indeed, consumer confidence in October fell to -24 from -19- the lowest since January, 1994. Similarly overall economic confidence fell to its lowest levels in 14 years as it dropped to 80.45 from 87.5.

Forex traders chose to overlook the unexpected strength in the German labor markets as the hiring was fueled by a backlog in orders which is expected to decline as global demand wanes. Further evidence that price pressures are easing also crossed the wires as French PPI slowed to 6.1% from 6.9% on the back of lower oil prices. This will give the ECB the green light to cut rates by 50 bps as expected on November 6Th . The expected coordinated rate cut by the major central banks didn't come to fruition, but easing from President Trichet is almost certain. It will be hard for the MPC to ignore the decline in domestic demand and sentiment in the region. The Euro could continue to trade heavy throughout the week, unless risk appetite continues to drive Euro bullish sentiment.

The Pound would reach as high as 1.6675 overnight as the momentum from increased risk appetite would lead it to the highest level in over a week. Another month of declining home prices would stall the Pound momentum as Nationwide reported a 1.4% drop in values. Expectations that the BoE will begin a prolonged period of easing, has started to weigh on the sterling sinking it back below 1.6500. U.K. policy maker David Blanchflower stated ``If rates are not cut aggressively we do face the prospect of a relatively deep and long-lasting recession.'' The markets are pricing in 198 bps worth of cuts over the next twelve months according to Credit Suisse overnight index swaps. The declining interest rate outlook should send the pound lower with a re-test of 1.5500 likely in the near-term.

Growth in the U.S. is expected to have contracted by 0.5% as the retrenchment by consumers and businesses in the face of the credit crisis takes its toll. A greater than expected decline in growth could add to the dollar's recent weakness as forex traders will start to bet on a prolonged U.S. recession. If the growth numbers surprise to the upside, then the dollar may resume its current dominate bullish trend and extend its gains against the Euro and Pound. Although the Fed hinted at the possibility of further easing following their 50 point cut yesterday, stronger than expected growth could keep the MPC on hold. Renewed risk appetite could continue to weigh on the dollar as traders sell U.S. treasuries in favor of higher yielding assets. However, as the fundamental data continues to show that a prolonged global recession is likely, the dollar may continue to find support over the medium term.

DailyFX

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