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• British Pound Lags as Moody's Expected Additional UK Bank Losses of £130 Billion
• Euro Gains as European Commission Forecasts Regional Growth in Q3, Q4
• Canadian Dollar Down as Capacity Utilization Falls to Record Low
US Dollar, Japanese Yen Up Slightly Ahead of Expected Surge in US Retail Sales
The US dollar and Japanese yen gained against the British pound, Japanese yen, and commodity dollars on Monday, but the moves mostly came during the Asian and European trading sessions as news flow during the US trading session was very light. However, this will change on Tuesday as the Commerce Department is forecasted to report that US retail sales jumped 1.9 percent in August, which would mark the biggest monthly rise since January 2006, led by increased auto and gas station sales. Indeed, as the deadline for the cash for clunkers program neared on August 24, eligible buyers likely rushed to take advantage of the deal. Furthermore, this index is not adjusted for inflation, so the steady rise in average gasoline prices during the month should contribute to overall gains.
That said, excluding items like autos and gas, advance retail sales are projected to edge only 0.1 percent higher, following 5 consecutive months of contraction, and there may be even greater upside potential due to back to school shopping. Measures of consumption could start to deteriorate once again in September, though, as the impact of the cash for clunkers program fades and as unemployment continues its steady ascent. Nevertheless, if the August reading of US advance retail sales reflects strong results, the US dollar could rally in response.
British Pound Lags as Moody's Expected Additional UK Bank Losses of £130 Billion
The British pound lagged against most of the majors as Moody's Investors Service Ltd said that UK banks may record additional losses on loans and securities of at least £130 billion, after already racking up losses £110 billion since the start of the credit crisis in 2007. Moody's said the outlook was based on expectations that the sustained weakness of the UK macroeconomic environment will translate into higher loan arrears with ensuing pressure on profitability and capital.
The British pound faces additional event risk on Tuesday from the release of the UK's consumer price index (CPI) reading for the month of August is expected to rise 0.3 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.4 percent, the lowest since October 2004, from 1.8 percent, keeping inflation within the central bank's acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.
Related Article: British Pound Weekly Trading Forecast
Euro Gains as European Commission Forecasts Regional Growth in Q3, Q4
The euro was one of the strongest major currencies on Monday after the European Commission published updated economic forecasts that showed the Euro-zone may expand 0.2 percent in Q3 and 0.1 percent in Q4 after contracting 0.1 percent in Q2. However, the European Commission's full year forecast for GDP to fall by 4 percent did not change from their May estimates. The latest release of industrial production for the region doesn't necessarily back these projections up, though, as output fell for the second straight month in July, this time by 0.3 percent, while the annual rate rose to -15.9 percent from -16.7 percent. Despite other signs of improvement in the manufacturing sector, the data suggests that export demand remains fairly lackluster.
Related Article: Euro Weekly Trading Forecast
Canadian Dollar Down as Capacity Utilization Falls to Record Low
The Canadian dollar took a beating throughout the Asian and European trading sessions, and while Canadian data was disappointing, the currency didn't show much of a response upon its release. Canadian capacity utilization fell to 67.4 percent in Q2 from 70.2 percent, marking the eighth straight decline and the lowest reading since recordkeeping began in 1987. Looking at individual industries, forestry and logging led the decline by slumping to 64.2 percent from 72.0 percent, while manufacturing capacity utilization remained weak and slipped to 64.2 percent 67.1 percent. The data adds to evidence that the decline in US export demand for Canadian goods has weighed heavily not only on production, but overall growth.
Related Article: Canadian Dollar Weekly Trading Forecast
Written by: Terri Belkas, Currency Strategist for DailyFX.com