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The British Pound may see selling pressure in European hours with UK Retail Sales set to drop -0.4% in February, the first decline in four months. Overnight data saw New Zealand's Current Account deficit widen to a record level in the fourth quarter while a leading economic index from the Conference Board added to evidence that Australia will see recession in 2009.

Key Overnight Developments

• New Zealand Current Account Deficit Widens to Record Level in Q4
• Australian Economy Shrinking At Pace Unseen Since 2001, Says Conference Board

Critical Levels

The Euro traded sideways in a choppy 60-pip range above 1.3550 in the overnight session. The British Pound inched higher, adding as much as 0.5% against the US dollar to test above the 1.46 level.

Asia Session Highlights

New Zealand's Current Account deficit widened more than economists expected, showing a shortfall of -NZ$4.03 billion in the fourth quarter. In annual terms, the deficit widened to a record -NZ16.07 billion in the year to December. The deficit now amounts to 8.9% of the economy's total output, the largest among industrialized countries, and is expected to remain higher than New Zealand's counterparts at least through 2010. Standard & Poors has said that it may cut the country's sovereign credit rating on concerns that it won't be able to adequately fund the shortfall. If this proves to be the case, it will imply a net outflow of money out of the country and threaten the value of the currency. Adding to the dour outlook, the International Monetary Fund said today that it expects New Zealand's economy to shrink 2% through 2009, noting households are constrained by high debt levels, falling house and equity prices, and uncertain employment prospects.

Australia's Conference Board Leading Index fell for the fifth consecutive month in January, printing at -0.6%. The reading is intended to forecast how the economy will perform in the next three to six months. The component measuring new building approvals led the decline, reflecting the deepening global recession and credit shortage that has steered consumers away from big-ticket purchases. In a statement accompanying the release, the Conference Board noted that the leading index is now falling at rates not seen since 2000-01, adding to evidence that Australia will sip into recession this year. A leading index published by Westpac Banking Corp echoed the same sentiment last week, falling to levels consistent with contracting economic activity. Australia's GDP unexpectedly shrank -0.5% in the fourth quarter, the first negative print in 8 years, with a recession confirmed should the economy contract again in the three months to March. Minutes from the last policy meeting of the Reserve Bank of Australia said the central bank has flexibility to cut interest rates further, with overnight index swaps pricing in 25-50 basis points in easing over the next 12 months.

Euro Session: What to Expect

UK Retail Sales headline the economic calendar in European hours, with expectations calling for a -0.4% drop through February, the first negative reading since September, to bring the annual growth rate down to 2.5% from 3.6% in the preceding month. Rising unemployment is likely to weigh on disposable incomes, pressuring spending lower. Private consumption is the largest component of overall economic growth, so weakness here bodes ill for Britain's ability to climb out of the current downturn. Indeed, the IMF has predicted that this time around the UK will see the worst recession among the G7 nations. A final revision of fourth-quarter GDP figures later this week is set to show that the economy shrank -1.5% in the three months to December 2008, the most in nearly three decades.

Although consumer prices rose in February, the uptick is unlikely to be reflective of a rebound in economic activity. Rather, the rise probably owes to currency depreciation, making foreign-made products more expensive for British consumers. Indeed, the British Pound slipped -0.8% against the currencies of its top import partners in February and a hefty -29.5% through 2008.

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