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The Euro reached back above 1.4000 as a revised higher final PMI service reading to 44.7 from 44.5 helped provide support. A surprise improvement in Germany to 45.2 from 44.3 helped offset lower revisions in France and Italy.

Talking Points
• Japanese Yen: Failed To Hold 96.00
• Pound: PMI Services Falls
• Euro: Retail Sales Falls More Than Expected
• US Dollar: 4th of July Holiday

Euro Regains Footing But Drop In Retail Sales Could Be Weighing Factor


The Euro reached back above 1.4000 as a revised higher final PMI service reading to 44.7 from 44.5 helped provide support. A surprise improvement in Germany to 45.2 from 44.3 helped offset lower revisions in France and Italy. Euro bulls then chose to ignore a bigger than expected drop in May Euro-Zone retail sales of 0.4% versus expectations of -0.1%, which dragged the annualized reading to -3.3% from -2.3%. The drop in consumption was lead by non-food sales which fell 0.7% as unemployment reaching 9.4% continues to lead consumers to retrench.

The ECB acknowledged that growth will be difficult to come by for the rest of the year following its decision to lead its benchmark rate at 1.00%. However, President Trichet did forecast that positive results could come as soon as mid 2010. The central bank is expected to keep rates unchanged over the near-term as they asses the impact of their cover bond purchase program. However, President Trichet didn't rule out future cuts which could limit the upside potential for the single currency. The 20-Day SMA continues to provide support at 1.3984 and until we see a break below a re-test of 1.4340-6/3 high remains a possibility.

The pound continued to see see-saw price action as GBP/USD would reach as high as 1.4632 before a sharp reversal back below 1.6350. Better than expected PMI service and BoE equity withdrawal prints have helped sterling regains its footing. The measure of the service sector fell from 51.7 to 51.6 but beat expectations of 51.5. Meanwhile, the amount of money Britons pulled from their homes fell by a record £8.1 billion in the first quarter but beat expectations of £9.0. The gauge is a strong indicator of demand for big ticket items like cars and vacations. The GBP/USD is threatening to close below the 20-Day SMA for the first time since 4/29 which would be a significant bearish sign. However, I would wait until I see a break below 1.6187-6/18 low before I have conviction of a significant break lower.

The dollar has given back some of its gains following yesterday's dismal Non-farm payroll release which sparked a flight to safety. European equity markets are only trading slightly lower which could be a sign that optimism still remains. The labor picture is expected to lag and traders will turn their focus to leading indicators for signs of continued improvement. Monday's ISM Non-manufacturing release will highlight next week's calendar and if the sector gets closer to expansion then we could see risk appetite restored and the dollar trade lower.

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