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The euro suspiciously dropped over 60 pips prior to the dismal German retail sales report which showed the steepest drop in a year. Consumption in Europe's largest economy unexpectedly fell by 1.5% versus forecasts of a gain of 0.2%.
• Japanese Yen: Flat As Tankan Shows Improvement
• Pound: Firm Despite Weak Manufacturing PMI
• Euro: Sunk By Drop In German Retail Sales And Rising Unemployment
• US Dollar: Slew of Data and Bernanke on Tap
The euro suspiciously dropped over 60 pips prior to the dismal German retail sales report which showed the steepest drop in a year. Consumption in Europe's largest economy unexpectedly fell by 1.5% versus forecasts of a gain of 0.2%. Apparel and automobile purchases dropped 5.9% and 4.6% respectively as Germans concerned over a weak labor market continue to retrench. This was evident as Euro-Zone unemployment reached a ten year high of 9.6% as companies continue cost cutting. Meanwhile, the final reading for Euro-Zone manufacturing PMI was revised to a 16 month high of 49.3 from 49.0.
The dour fundamental data offset the IMF's upward revision to their growth forecast for the global economy in 2010 to 3.1% from 2.5% which expected to be led by Asia. Indeed, China and India are expected to pace the rest of the world with gains of 9.0% and 6.4% respectively. However, the international organization also warned of a potential investment bubble in China due to its sharp credit expansion. Despite the upbeat outlook, markets appear to be focusing on the potential flattening of the global economy after an initial recovery which is beginning to be supported by fundamentals. Therefore, if we continue to see a pull back in risk appetite there may be more Euro weakness ahead.
The British pound has started to regain its footing following yesterday's weakness despite a weaker than expected U.K. manufacturing PMI print. Activity fell for a consecutive month to 49.5 from 49.7 missing economist forecasts of 50.2. It also marked the second time the sector contracted since its brief expansion in July. Sterling has steadily gained after dropping nearly 1000 pips throughout September to fall to 1.5769. There we saw neckline support from a potential head & shoulders formation which could still play out with a possible test of the 200-Day SMA at 1.5428.
The dollar was well bid overnight as the disappointing data from Europe added to the weak manufacturing and employment results in the U.S. to stoke concerns over the global recovery's sustainability. As depleted inventories get restocked activity is expected to stabilize unless consumer consumption increases. A slew of data will cross the wires during the U.S. session including personal consumption readings, initial jobless claims and ISM manufacturing. Forecasts are for an uptick in activity and domestic spending with employment remaining stable. However, if we see combined weakness, it could fuel prevailing pessimism and spark dollar bullish sentiment. The main event risk for the day may come from Fed Chairman Bernanke testifying in front of the House Financial Services Committee. The central bank leader isn't expected to talk specifically about future policy but any comments will be closely monitored to gauge when the FOMC may start to consider a tightening policy.
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To discuss this report contact David Song, Currency Analyst: email@example.com