The euro remained a laggard this morning as Euro-zone GDP in the Euro-zone was revised down to match a 3+ year low of 1.4 percent in Q2 from a year earlier from 1.5 percent.
Euro-zone retail sales fell more than expected by 0.4 percent in July (something we forecasted in yesterday’s Daily Fundamentals). Nevertheless, the key to the euro this week will almost certainly be the European Central Bank’s policy meeting. They are widely anticipated to leave rates steady at 4.25 percent, but as usual, ECB President Trichet should be the bigger market-mover as his commentary tends to be biased and direct. In fact, the latest EUR/USD bear leg was sparked by his comments on August 7, as he turned his attention away from inflation to slowing growth. Since the ECB’s last meeting, evidence continued to point toward a sharp economic slowdown, while CPI estimates for August unexpectedly slipped to an annualized rate of 3.8 percent, down from the official July reading of 4.0 percent. That said, CPI is still well above the ECB’s 2 percent target. The news is in line with Credit Suisse overnight index swaps, which are pricing in just over 25bps worth of rate cuts within the next 12 months. In the end though, Mr. Trichet’s comments could prove to be a non-event, as his stance in unlikely to shift dramatically from last month.
Related Article: Forecast for Euro Dollar Ahead of ECB Meeting
The US dollar may have ended the day higher against many of the majors, but there are indications that the tide may be turning for the greenback. First, the plunge in crude oil futures - which has supported much of the dollar’s gains - has started to cool down. Next, Credit Suisse overnight index swaps, which priced in 62bps worth of Federal Reserve rate hikes over the next 12 months on Tuesday, have backed off to price in 49bps as of Wednesday’s close. US economic news proved to be a non-event, as the Fed’s Beige Book was similar to previous releases, noting that consumer spending is weakening while price pressures remain an issue for most industries. Thursday’s US data, however, should be a bit more market-moving with ISM non-manufacturing (services) scheduled to be released. This figure has held below the critical 50 level – signaling contraction – during 5 of the past 7 survey periods, and unfortunately for dollar bulls, ISM services is anticipated to hold at 49.5 in August. The key to the currency’s reaction, though, is where the index stands relative to 50, as a push above there could trigger another rally for the greenback while a sharper contraction could spark dollar sell-offs. The other factor to watch is the employment component, as this tends to be a good leading indicator for Friday’s US non-farm payrolls. My fundamental bias for the US dollar through the end of the week: bearish. I do think the ECB and BOE rate decisions bear watching though. As we saw last month, ECB President Trichet’s comments can spark wild volatility market-wide.
