Euro Bounces as ZEW Hits an 8 Month High

· Kiwi: Retail Sales beat estimates
· Aussie: Business confidence at 10 month high
· Pound: Trade Balance shrinks due to decline in imports
· Euro: ZEW lower than last month but beats forecast
· Dollar: Retail Sales key to dollar strength

German investor confidence rose to an 8 month high hitting 5.8 versus 2.9 the month prior as to the surprise of the market, ZEW participants dismissed concerns over a slowdown in the US economy and the impact of VAT hikes in Germany and maintained their optimism over the near term economic prospects for the region. As evidence mounts that the German industrial engine continues to operate on all cylinders, investor confidence in the EZ largest economy is improving steadily with the ZEW recording its second positive monthly reading in a row after bottoming out in November of 2006 at -28.5. Although the ZEW data tends to have only a fleeting impact on the currency market, the news helped to lift EURUSD off the session lows as traders squared positions ahead of the far more important US Retail Sales report due later today at 12:30 GMT.

Despite the fact that the price action in the pair could be easily reversed if the US data prints to the upside, today’s ZEW release does play into the euro bullish thesis that the two largest economies in the world are beginning to decouple with EZ growth clearly accelerating while US economy appears to be on the verge of a slowdown. Today’s US Retail Sales report will go a long way in either supporting or refuting this point of view. In a land where consumer is king, today’s US Retail Sales number becomes especially significant and depending on its outcome could provide directional bias for the EURUSD not only for today but for the rest of the week.

In UK the Visible Trade Balance data printed better than expected with the deficit contracting to -6226M pounds against forecast of -7000M. The pound initially rallied in a knee jerk reaction to the data, but when traders analyzed the details of the report, their enthusiasm waned. The improvement in the UK Visible Balance was due entirely to the contraction in imports rather than the gain in exports as Britons simply spent less rather than sold more goods. Once the market digested the news cable returned to it pre-release levels trading below the 1.9300 level. The currency was also weighed down by the decline in the important RICS housing survey which printed at 24 hitting a 9 month low. While the RICs reading still paints a positive picture for UK housing, it suggests that price growth in the sector may have peaked which in turn is likely to moderate any BOE impulses for further rate hikes in the near term.