Euro Kneecapped by Deteriorating Consumer Confidence - Which Economy Will Hurt The Mo

[DailyFx]

Talking Points

• Japanese Yen: makes a run to 104.00 as Nikkei bounces and dollar strengthens
• New Zealand Dollar: Business confidence improves
• Euro: kneecapped by deterioration in consumer sentiment
• Pound: Hurt by news that services sector profits worst in 10 years
• US Dollar: Consumer confidence and New homes on tap


The start of post holiday trade produced smiles on faces of euro bulls as the pair barreled its way above the 1.5800 figure on the back of strong German GDP results but trading quickly turned ugly after the GFK survey revealed a much worse than expected deterioration in consumer sentiment in the region’s largest and most important economy.

German Q1 GDP printed as expected at a 2.6% annual rate as construction spending resulted in the fastest pace of growth in 12 years. The EURUSD rose to a high of 1.5818 but the celebration was short lived as the GDP data was immediately followed by shockingly low print in GFK consumer confidence survey which posted a reading 4.9 versus 5.7 the month prior. Most disappointing of all was the sharp decline in willingness to buy which decreased to –20.4 from –4.7. The news bodes badly for the upcoming German Retail Sales data this Friday and suggests that faced with relentlessly rising energy prices, the German consumer is retrenching hard despite relatively healthy growth in the overall economy.

In UK cable also took a beating as CBI survey disclosed that service sector profits have fallen to a 10 year low, as the British economy continues to suffer from the aftershocks of the credit crunch. The CBI news was somewhat offset by the release of BBA mortgage approval data which bounced back to 38.7K from 35.4K the moth prior. After plumbing lows at 1.9714 sterling rebounded to 1.9760 by early London trade.

With European data out of the way attention now turns to the North American session with traders asking – which consumer economy will crumble first? Today’s US consumer confidence numbers could reverse all of EURUSD losses if the data prints worse than forecast and speculation rises that the US economy is heading for an actual recession rather than a mere slowdown in the second half of 2008. If on the other hand US consumer sentiment readings do not confirm the dollar bear’s worst nightmares the greenback could continue to strengthen for the rest for of the day.

With much better economic growth the long term advantage in the currency market remains with the euro. However, as we noted yesterday if consumer demand in the 15 member region suddenly collapses, the unit will have a difficult time rising much beyond its recent highs, as pressure on the ECB to ease will increase markedly.

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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: bschlossberg@fxcm.com