The Euro fell below the 1.4400 price level for the first time since January 22, as the region is fast approaching a recession. Indeed, 2Q GDP for the region contracted 0.2% dragging the year-over-year growth to 1.4%.
[B][U]Talking Points[/U][/B][B] [/B]
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· [B]Japanese Yen: Finds Support at 108.45[/B]
· [B]Pound: Dips Below 1.7700 Before Rebound In Services[/B]
· [B]Euro: Slips Below 1.4400 As Retail Sales And Grow Contract[/B]
· [B]Canadian Dollar: BoC Rate Decision Ahead[/B]
· [B]US Dollar[/B][B]: Beige Book and Factory Orders On Tap[/B]
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[B][U]Euro Drops Below 1.4400 As Retail Sales And GDP Signal Recession Ahead?[/U][/B]
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The Euro fell below the 1.4400 price level for the first time since January 22, as the region is fast approaching a recession. Indeed, 2Q GDP for the region contracted 0.2% dragging the year-over-year growth to 1.4%. Additionally, retail sales fell 0.4% in July versus expectations of a 0.1% gain, which was the fifth decline in the last six months. The currency came under heavy selling pressure ahead of the economic releases falling over a 100 points finding support at the psychological level before the dour data would lead it below.
Germany and France’s the regions largest economies lead the decline in growth as they contracted 0.5% and 0.3% respectively. The biggest slowdown came from a 2.2% drop in construction activity, signaling that continued weakness lies ahead. Meanwhile, a 3.4% drop in food sales led to the decline in consumer consumption as record prices sapped purchasing power. The ECB is expected to keep their benchmark rate on hold tomorrow, but President Trichet and committee members may find it hard to maintain their ardent stance on price stability. The MPC is known to signal future rate policy actions as it did with its recent rate hike. Therefore, we may see President Trichet hint at a rate cut for the following rate decision, which could see the Euro continue to fall.
The Pound fell below 1.7700 for the first time since April, 17, 2006 as speculation increases that the BoE may cut rates. Although expectations are that the central bank will keep rates on hold at tomorrow’s meeting, Credit Suisse overnight index swaps are pricing in 91bps worth of cuts within the next 12 months. Therefore, don’t be surprised if the MPC surprises with a 25 bops rate cut as it tries to keep its economy from falling into a recession. The Sterling found some support as the PMI services report for August showed an improvement to 49.2 from 47.4 the month prior. However, the sector which accounts for 70% of GDP remains in contraction.
Oil prices heading back towards $108 today will add to the dollar bullish story. The greenback will look to continue its gains toady against the major currencies as the U.S. economy is increasingly becoming the most attractive amongst the G-7. MBA Mortgage applications, Challenger Job cuts and factory orders will prevent minimal event risk with Non-farm payrolls looming at the end of the week. However, a significant increase in job cuts could lower the outlook for the job report and spark bearish dollar sentiment. However, most eyes today will be on the Fed Beige book report. The report on the conditions from the 12 Federal Reserve districts could validate the bullish sentiment on the U.S. economy and add to the greenback’s gains. However, with the labor market remaining weak and the dissipating effects from the fiscal stimulus plan I expect that the report may disappoint traders and lead to the dollar weakening.
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