The dollar rallied sharply against the euro in the Tuesday session, surging to its highest level in over a month at 1.3142. The currency benefited from an unexpected narrowing in the US trade deficit to $40.44 billion in November from calls for a deficit of $51.5 billion and improving from October at $57.19 billion. The deficit narrowed to its lowest level since 2003 and was attributed to a sharp decline in exports, which contracted by 5.8% in November and imports shrunk by 1.6%.

The economic calendar for Wednesday consists of December retail sales, with the headline expected to improve to -1.2% compared with -1.8% in November. The core retail sales figure is also seen improving to -1.3% in December versus -1.6% a month earlier.

Euro Slides

The euro plunged to its lowest level since early December at 1.3142 on a combination of safe-haven flows into the greenback and traders positioning ahead of the key ECB monetary policy meeting on Thursday. In the session ahead, traders will analyze Germany GDP, which is estimated to decline to 1.8% from 2.5% and November industrial production, seen deteriorating further to -1.8% from -1.2% a month earlier and -6.0% compared with -5.3% in the previous year.

The ECB is expected to announce its monetary policy on Thursday at 7:45 AM with a 50-basis point rate cut to 2.0% widely anticipated. Given the sharp deterioration in economic fundamentals throughout the Eurozone, we continue to look for the ECB to ease policy to stimulate the economy. The subsequent press conference from Bank President Trichet will be closely scrutinized for clues as to whether additional rate cuts can be anticipated.

EURUSD has recovered back toward the 1.32-level, with additional resistance seen at 1.3240, followed by 1.3270 and 1.33. Subsequent ceilings are eyed at 1.3350, followed by 1.3380 and 1.34. On the downside, support is seen at 1.3170, backed by 1.3140 and 1.31. Additional floors will emerge at 1.3070, followed by 1.3030 and 1.30.