The Euro spent the overnight sessions seesawing between 1.2800 and 1.2900. The EURUSD was headed toward near-term support at 1.2800 when a 0.2% drop in retail sales crossed the wires.
Talking Points • Japanese Yen: Falls to Test 98.30 AS Risk Appetite Wanes • Pound: Manufacturing Falls For Seventh Month • Euro: Retail Sales Drop • US Dollar: ISM Non-Manufacturing On Tap Euro and Pound Trade Choppy Ahead Of Rate Decisions, As Fundamentals Deteriorate The Euro spent the overnight sessions seesawing between 1.2800 and 1.2900. The EURUSD was headed toward near-term support at 1.2800 when a 0.2% drop in retail sales crossed the wires. Although, the print was better than the 0.4% decline that was expected, it shows that despite easing inflation consumers have started to retrench. The final reading of Euro-zone PMI came in at 43.6 which was lower than the preliminary read of 44.6 an already record low for the series. The deterioration in the service and manufacturing sectors would lead to Euro weakness before it ultimately found support at 1.2840. The declining fundamentals will give the ECB all the evidence that it needs to aggressively cut rates at tomorrow’s policy meeting. Recent rhetoric from council members has signaled that the MPC is abandoning their price stability focus for measures to promote growth. Demonstrated by these comments from member Juergen Stark ``We're ready to use all instruments at our disposal and the main instrument is interest-rate policy as long as our mandate'' to contain inflation ``allows it,'' . There has been some speculation that a rate cut from the central bank may spur hope that it will stabilize the region’s economy and lead to Euro strength. However, we do not subscribe to that view as fundamentals are clearly showing the economic union is heading into a recession and may have to significantly reduce their benchmark rate to reverse the current growth trend. Therefore, although we may see the Euro settle in a short –term trading range between 1.2500 and 1.3000, ultimately the pair will look to test 1.2000 and below. The Pound similarly to the Euro has traded choppy as it bounced between 1.5800 and 1.600 throughout out the Asian and European trading sessions. An unexpected jump in consumer confidence to 55 from 47, which was the first rise since December, 2008 as easing inflation and the measures taken by the government to stem the credit crisis, has raised optimism. Although this may help domestic growth down the line, a drop in the service industry to its lowest level since the series began in 1996 shows that the economy may be headed for a deep recession. The sector which accounts for 75% of GDP fell to 42.4 from 46.0 and remained in contraction for the fourth straight month. Similarly the manufacturing sector declined 0.8% in September after a 0.6% drop the month prior, marking the seventh straight month of declines. The BoE is expected to cut rates by 100 bps at tomorrow’s policy meeting, which should lead to the pound trading heavy leading up to the policy meeting. However, there is long-term trend line support near 1.5800. The U.S. calendar will also reveal its reading for the service sector. The ISM Non-Manufacturing report is expected to show the sector contracted for the first time in three months as the credit crunch and slower spending forced companies to cut payrolls. This is expected to be evident in the ADP employment report that is anticipated to show a 100,000 reduction in private jobs, which would be the first triple digit loss since November, 2002. The weak fundamentals may lead to dollar weakness as expectations may increase that the country will endure a severe recession. The reports are also leading indicators for Friday’s Non-farm payroll report which is expected to show 200,000 in job losses. A declining labor market will dim the outlook for domestic growth and could add to dollar weakness. However, with the expectations that the BoE and ECB will cut rates tomorrow as their economies follow the U.S. into recession, the relative outlook for the economies could spur bullish dollar momentum. Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum Related Articles: Forex Technical and Fundamental Forecasts for November Euro-Zone Retail Sales Falls as the Financial Crisis Drags on the Real Economy U.K. Services PMI Slumped to 12-Years Low, Calls for a Sharp Rate Cut To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com