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The Euro is struggling to hold onto gains it generated at the onset of European trade derived from improving consumer sentiment in Germany and Italy. Optimism in Italy was its highest since December, 2006 while Germans saw their outlook improve the most in 15 months

Talking Points
• Japanese Yen: Under Pressure As Risk Appetite Returns
• Pound: Decline in Private Investment Offsetting Rise in Home Prices
• Euro: Rise in Sentiment Balanced By Decline In Retail Sales
• US Dollar: GDP, Initial Jobless Claims on Tap

Euro, Pound Consolidate On Balanced Data, Will U.S. GDP Spark Volatility

The Euro is struggling to hold onto gains it generated at the onset of European trade derived from improving consumer sentiment in Germany and Italy. Optimism in Italy was its highest since December, 2006 while Germans saw their outlook improve the most in 15 months. However, the bullish sentiment was short lived as the Euro-Zone retail PMI released showed that consumer s remain retrenched as they are still shell shocked from the credit crisis. The August reading fell to 47.1 from 47.3 the month prior as the sector remained in contraction for a 15th straight month.

European retailers saw declines across the board led by apparel and footwear, but a drop in food sales below 50 is the most discerning figure. The contraction in the non-discretionary component signal that consumers continue to tighten their wallets which could make future growth prohibited. The data supports recent rhetoric from the ECB that growth will be difficult to obtain once public spending dissipates as private investment will dry up absent increased consumer consumption. The 50-Day SMA appears to have capped the EUR/USD's advance which may signal that more bearish potential exists. However, 1.4200 appears to be providing solid support and is a key level to watch.

The British pound has also spent the overnight session in consolidation mode, despite Nationwide LLC reporting that home prices rose the most since 2006. The average cost of a home climbed 1.6 percent to 160,224 pounds which surpassed economist forecasts of 0.5%. The improvement in the housing sector has been a source of hope for the U.K. economy but concerns remain that small businesses are finding it difficult to garner the necessary credit to invest in opportunities. Indeed, the quarterly total business investment report showed a 10.4% decline in the second quarter which was well below estimates of -3.6%. The private sector saw a 16.8% drop in investment versus -4.4% the prior three month period. Also disconcerting is the 188% free fall in investment from public companies which may only get worse as tax receipts continue to dry up. We may see support at yesterday's low of 1.6160 but an ultimate test of 1.600 appears likely for the GBP/USD.

The U.S. dollar has given back some of its gains from yesterday as traders take profits and equities regain support. It was hard to pinpoint the cause of the greenback's advance as a case could be made for improving fundamental data and broader risk aversion. We may not be able to answer that question until next week's NFP report where we could see a strong employment report lead to a shift of the paradigm from risk to fundamentals. Today's GDP report may shed some light on the current relationship as the expected revision to -1.5% from -1.0% could spark risk aversion and lead to dollar support. Conversely, the data would signal that the U.S. economy is further than expected to returning to growth which could weigh on the greenback if we see it trade on a fundamental basis. Typically an initial jobless claims report takes a back seat to the growth figures, but today it could steal the show with the employment report due next week. The labor market remains a concern and if there is a significant improvement then we could see it lead to dollar support, if we are indeed on the verge of a paradigm shift.

Will The EUR/USD Remain Above 1.4000? Join us in the Forurm

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com