daily brief

German Retail Sales Disappoints, Manufacturing Falls to Record Low

Monday, 01 September 2008 10:23:39 GMT  |  David Song, Currency Analyst

German retail sales fell for the second consecutive while manufacturing activity contracted in August. Heightened growth concerns for the European Central Bank may leave the central bank on the side lines, but don't expect the hawkish comments to stop.

Talking Points   

·          Japanese Yen: Rise in Risk Aversion Leads Yen to Break Below 108.00

·          Pound: Breaks below 1.80, Triggering Stop Orders

·          Euro:  Retail Sales and Manufacturing Slump

·          US Dollar: Fed’s Kroszner and Hoenig’s Speech On Tap

After peaking to 1.4720 in the early Asia session, the EURUSD pulled back to hold near 1.4640 as crude oil prices slipped below $117 a barrel, helping to strengthen the US dollar. On the economic docket, retail sales data for Germany triggered mixed sentiment as the monthly reading crossed the wired much weaker than forecasts, while the yearly figure was unchanged from last year’s reading.

German retail sales fell for the second consecutive month as oil prices peaked to a record high of $147.27 in July. The release showed that the monthly reading slipped to -1.5% from -1.4% in June, which was much greater than the 0.3% decline expected by economists. Meanwhile, the yearly figure crossed the wires better than expected to hold flat at 0.0% from the previous reading of -3.9%. In a separate report, manufacturing activity in Germany was revised to a fresh record low of 49.7 from 50.9, while manufacturing activity in the Euro-Zone contracted for the third consecutive month. Despite the hawkish rhetoric from the ECB council members, downside growth risks have clearly become an ongoing concern for the central bank as they deal with record high inflation. With the ECB scheduled to meet this following Thursday, market participants have already raised bets that the central bank will be forced to hold the benchmark interest rate steady at 4.25% as economic activity continues to stall.

Hurricane Gustav along with volatile oil prices is likely to spur price action in the forex market as the US economic calendar remains bare for Labor Day. Amid the lack of economic data, FOMC voting member Randall Kroszner and Kansas City Fed President Thomas Hoenig are scheduled to speak later today. Comments from the Fed officials may not do little to spur volatility in as the US and Canada is offline, but any hawkish rhetoric may help to the US dollar to stay afloat as oil concerns continue to move the greenback.

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