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Euro, British Pound Rise Against the US Dollar Ahead of Retail Sales Report (Euro Open)

Wednesday, 14 January 2009 05:32:37 GMT  |  Ilya Spivak, Currency Analyst

The Euro mounted an impressive rally against the US dollar in overnight trading, rushing over 100 pips higher to test above the 1.33 level. The British Pound followed suit, reaching beyond the 1.46 mark. Forex traders are likely looking past a predictably dismal European economic calendar to the US Retail Sales report, with expectations calling for a -1.2% decline in December.

Key Overnight Developments

• Australian Home Loans Rise On Lower Interest Rates, Fiscal Stimulus
• Euro, British Pound Rally Against the US Dollar Ahead of Retail Sales Report


Critical Levels



The Euro mounted an impressive rally against the US dollar in overnight trading, rushing over 100 pips higher to test above the 1.33 level. The British Pound followed suit, reaching beyond the 1.46 mark.


Asia Session Highlights



Australian Home Loans added 1.3%, boosted by first-time buyers taking advantage of record low benchmark interest rates (down 300 basis points to 4.25% since September) and a A$1.5 billion government handout (as part of a A$10.4 billion stimulus plan). Home loan approvals for first-time buyers rose a whopping 23.6%, the highest in nearly 7 years. This is the third consecutive month of positive mortgage growth. However, it remains to be seen if the effects of policymakers’ efforts will have staying power as unemployment growth intensifies, steering consumers away from big-ticket items. Meanwhile, Investment Lending fell -6.1%, the largest drop in 8 months, weighed down by the global credit shortage.


Euro Session: What to Expect



France’s Consumer Price index is set to fall -0.3% in December to bring the annual inflation rate to 1.1%, the lowest in 18 months. Recent weeks have seen an analogous drop in German CPI, with initial estimates suggesting broader Euro Zone inflation will slow to 1.6% in the year to December. Price growth peaked in July along with commodity prices and has turned increasingly sluggish as economic growth in the regional bloc deteriorates. Indeed, Germany’s cumulative GDP Growth reading for 2008 is expected to print at 1.4% when adjusted for inflation, the lowest in 3 years. The European Central Bank is expected to cut interest rates by 0.50% later this week. A separate report is set to show that Euro Zone Industrial Production will shrink -6.1% in the year to November, the worst in over 15 years, as companies trim capacity in the face of falling demand at home and abroad.

On balance, acute deterioration in economic growth and further monetary easing are likely to have already been priced into the exchange rate, with the markets looking past the European calendar to the US Retail Sales release late into the session. Expectations call for a print at -1.2% in December, the sixth consecutive month of decline. Traders have treated the health of the US economy as proxy for that of the globe at large, betting that a recovery for the world’s largest consumer market will offer positive spillover elsewhere.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.

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