[B]Talking Points
• Japanese Yen: Hovers around 106.50 in quiet trade
• Euro: Hurt by weak retail sales, employment growth continues
• British Pound: Housing gauges stabilize
• Canadian Dollar; GDP on tap
• US Dollar: Jobless, Chicago PMI on tap[/B]
A day after another interest cut from the Fed and the EURUSD has lost most of its post news momentum after disappointing German Retail Sales figures raised concerns that the economic slowdown in US is starting to spread across the Atlantic. German Retail Sales printed at –0.1% versus 1.7% expected as consumers in EZ largest economy curbed spending in light of declining financial markets and stubbornly high energy costs.
This was the third consecutive monthly contraction in Retail Sales despite the fact that labor environment in Germany continues to improve. German unemployment rolls were reduced by a further –89K in December and the unemployment rate dropped to 8.1% from 8.3% forecast.
The lackluster retail demand coupled with contracting M3 growth should allay any inflationary worries on the part of ECB officials. Certainly, present economic data requires no further tightening and unless growth in the region suddenly accelerates the ECB is unlikely to raise rates for the rest of 2008.
In fact the more interesting consideration is the possibility of monetary easing from the ECB as the year progresses. For the time being the improving labor markets allow Mr. Trichet and company to remain unapologetically hawkish, but should employment begin to slow or worse contract, the pressure on the ECB to ease will become enormous. EURUSD’s retreat from the 1.4900 level is a testament to the fact that many market participants do not believe that euro’s interest rate advantage over the dollar will last long if US economic slowdown begins to affect the rest of the world.
Still, any calls for an end to the EURUSD rally may be premature. Yesterday’s US GDP data was shockingly low, suggesting that economic growth is virtually at a standstill. If tomorrow’s NFP data once again proves disappointing, all concerns about EZ growth will be shrugged off as focus will once again turn to US and further monetary easing from the Fed. In that scenario the EURUSD could easily challenge its all time highs and target the key 1.5000 level as anti-dollar sentiment takes over.
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