Euro Benefits from Deteriorating US Outlook for US Economy

Yesterday, ECB President Trichet signaled to the markets that despite the recent slowdown in European growth, they still have full intentions of raising interest rates next month. This of course is bullish for the Euro and helped to take the currency higher against the US dollar. However the breakout in the Euro today was more a reflection of the deteriorating conditions in the US economy than the more promising outlook in the Eurozone.

We are currently in an environment where the Federal Reserve may have no choice but to slowly downgrade their degree of hawkishness while the ECB is expected to deliver one and possibly even two rate hikes by the end of the year. Although service sector ISM in the Eurozone was stronger than expected in the month of July, but retail sales for the region was weaker. Like the US, the economic calendar is relatively light. German factory orders, industrial production, the trade and current account balances are the only pieces of data that are potentially market moving and even then, they are second tier data. All of these reports reflect aspects of the Eurozone economy that may be affected by the strength of the Euro. Therefore a downside surprise is far more likely than an upside one. Meanwhile, the Swiss franc rallied significantly today despite a drop in consumer prices. With gold prices up sharply, this may reflect flight to safety. Swiss unemployment and the SECO consumer climate reports are due for release next week. Overall, the Swiss economy has been doing very well, which is why we expect both reports to be firm.