Euro Weakens On Slumping German Retail Sales, Dollar Gains As Global Recession Fears Return

Talking Points

• Japanese Yen: BoJ Cuts Rates By 20 Bps
• Pound: Trading Heavy As Risk Aversion Returns
• Euro: German Retail Sales Slump
• US Dollar: Personal Spending and Chicago PMI On Tap

Euro Weakens On Slumping German Retail Sales, Dollar Gains As Global Recession Fears Return

The Euro would fall to 1.2667as German retail sales fell 2.3% in September after growing 1.9% the month prior. The credit crisis and an expected recession has sunk consumer confidence and curbed spending. The Euro may continue to trade lower heading into next week as the ECB is expected to cut rates by 50 bps at their November 6th policy meeting. Price pressures have clearly abated with the CPI estimate dropping to 3.2% from 3.6% which is the lowest since January. This will open the door for additional easing from the central bank which could be the second of several rate cuts. ECB member Axel Weber's statements that 'if the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve' adds support to this argument. As the MPC continues to become more dovish the Euro will continue to fall and a test of 1.200 may come in the near-term.

The Pound has steadily fallen since it peaked at 1.6675 yesterday with global fears and an expected rate cut from the BoE weighing it down. Heavy GBP/JPY selling would help drag the pound down to 1.6111against the dollar before finding support. The downside risk to the U.K. economy continue to grow, with both the manufacturing and service sectors expected to report further contraction next week. Forex traders are now starting to price in a 100 bps rate cut from the central bank as aggressive easing is viewed as necessary by committee member David Blanchflower. The perennial dove has consistently warned throughout the year that without easing the country would find itself in its current predicament. Therefore, the BoE may take his lead and as expectations increase for a deeper rate cut, the pound will most likely continue trading heavy up to the November 6th policy meeting.

The Yen strengthened throughout the overnight session despite a 20 bps rate cut from the BoJ. The central bank changed their benchmark rate for the first time since December, 2006. Markets were expecting a 25 bps cut and the MPC feeling the need to take some form of action obliged with the odd reduction. The central bank was split and it took Governor Shirakawa's deciding vote to break the tie. The less then expected easing led to the Nikkei dropping 5% and erasing its recent gains. The increased risk aversion would see the Yen rise to 96.50 from 99.00 against the dollar.

The dollar has found support on renewed risk aversion, as traders start to fear that there is more fallout from the credit crisis. Indeed, there have been calls from Midwest governors to help the slumping auto industry with a liquidity infusion. Concern has grown that there may be one more shoe to fall which could be the failure of private equity firms as the contagion which has sunk banks and hedge funds continues to spread. Also, as businesses continue to close their doors the commercial real estate market is in jeopardy of sinking similar to the housing sector. Today's economic calendar will provide some minor event risk in the form of personal spending, personal income, U of M consumer confidence and Chicago PMI. Individually these data points may not have enough impact to impact market sentiment but if they combine to paint a dour outlook for the U.S. economy, it could weigh on the dollar. Declines in sentiment, consumption and manufacturing activity are expected which will only increase fears that a prolonged recession is underway. However, we expect the dollar to continue strengthen throughout the day as global recession fears grow and expected rate cuts from the ECB and BoE lend support.

DailyFX

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