Euro Open: Retail Sales to Shrink Again, Calling Out ECB

The Euro fell sharply in overnight trading, reaching the lowest levels in 8 months. Sterling also succumbed to selling pressure, falling to test the 1.77 mark. Dour Euro Zone economic data takes center stage again in the forthcoming European session. Retail Sales are expected to issue another negative result, while Gross Domestic Product is expected to be confirmed as shrinking -0.2% in the second quarter.

[B][U]Key Overnight Developments[/U]

• US Dollar continues to punish Euro, British Pound
• Australian economic growth at the slowest in 3 years, more rate cuts likely
• New Zealand economy loses last support as commodity export prices shrink

[U]Critical Levels[/U][/B]

The Euro fell sharply in overnight trading, reaching the lowest levels in 8 months. DailyFX Senior Currency Strategist Jaime Saettele sees the possibility of rally back above 1.46 before the downtrend resumes. Near-term support is seen at 1.4382, while resistance is established at 1.4600. Sterling also succumbed to selling pressure, falling to test the 1.77 mark. Support now stands at 1.7645, with resistance at 1.7971.

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[U]Asia Session Highlights[/U][/B]

Australia’s [B]Gross Domestic Product[/B] underperformed expectations, showing the economy grew at 2.7% in the second quarter versus 3.6% in the first three months of the year. This puts the pace of growth at the slowest in three years, fueling speculation that more monetary easing is in the pipeline. Yesterday, the Reserve Bank of Australia announced a 25-basis-point rate cut, bringing borrowing costs to 7.00%. Bond yield forecasts call for an additional 75 basis points of easing, culminating with rates at 6.25% by the second quarter of next year.

New Zealand saw the [B]ANZ Commodity Price Index[/B] shrink -3.3% in August, the weakest reading since late 2001. Sharp declines in dairy and aluminum prices led the drop. Commodity exports make up 30% of the smaller antipodean economy and their rapid depreciation will add considerable downward pressure on national income growth. The Reserve Bank of New Zealand has signaled they will be aggressive in cutting interest rates to help check the economy’s rapid slowdown. Current bond yield forecasts call for 200 basis points in rate cuts, bringing borrowing costs to 6.25% by the end of 2009.
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[U]Euro Session: What to Expect[/U][/B]

Dour Euro Zone economic data takes center stage again in the forthcoming European session. [B]Retail Sales[/B] are expected to issue another negative result, contracting -0.1% in July having lost -0.6% in the preceding month. This will mean retail activity is falling at an annualized -2.1%. To that effect, [B]Gross Domestic Product[/B] is expected to be confirmed as shrinking -0.2% in the second quarter, the first negative reading since the creation of the 15-nation currency bloc. This puts the Single Currency area just three months shy of an official recession.

The profound slowdown is sure to be addressed as the European Central Bank announces interest rate policy later this week. That said, borrowing costs are expected to remain on hold this time around. As we wrote yesterday, ECB President Jean-Claude Trichet has cited lingering price pressure “in the pipeline” as a key reason to hold off on cutting interest rates, saying it is “something which is ongoing and undoubtedly creates more risks.” The market is pricing in 50 basis points in rate cuts starting in first quarter of 2009, culminating with borrowing costs to 3.75%.

[I]To contact Ilya regarding this or other articles he has authored, please email him at <[email protected]>.
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