Euro Lifted By Retail

Talking Points

·          JPY Official reserves at record highs

·          UK Confidence nudges higher

·          EZ Retail rocks

·          US Calendar Consumer credit data only

EUR/USD recovered the 1.2800 figure after briefly slipping below that number as strong Retail PMI and Retail Sales results provided further evidence of economic recovery in the region.  Retail PMI rose to 56.3 materially higher than the 54.6 expected while Retail Sales climbed  2.8% on year over year basis far surpassing the 2.1% forecast. After nearly three years of dormancy the EZ consumer finally appears ready to spend as the labor environment in the region improves. Retail Sales in the Euro-zone should also be boosted by the upcoming World Cup tournament in Germany an event surpassed in size and scope only by the Olympics. In short, should this dynamic continue, the growth in domestic consumption will bode well for the future growth of the 12 member union.

As we noted yesterday, recent economic data demonstrates incontrovertibly that US economic fundamentals are deteriorating while EZ data is improving. However, that fact alone will not necessarily lead to higher EUR/USD exchange rates. The market is deeply focused on the immediate monetary policy moves from each respective central bank. Earlier in the week, speculation ran rampant that ECB would hike rates by 50 basis points at its rate announcement meeting tomorrow. Those expectations have been greatly curbed, as most market players now feel that the ECB will err on the side of caution and opt for a gradualist approach of 25bp rate hikes. The central bank may feel that an aggressive move to 50bp will exacerbate euros rise, especially against the yen where the currency has been hovering near all time highs creating serious problems for EZ exporters to Asia. Many market participants speculated that ECB policy choice of not raising rates in May was driven by these specific considerations.

On the flip side, Fed Chairman Bernankes hawkish monetary stance despite softening  US data, has surprised many players and pushed the Fed funds futures rates above 70% for a possible 25bp hike to 5.25% in June.  Market folklore suggests that Fed always overshoots in its attempt to control inflation, and Mr. Bernanke stung by criticism of ineptitude at the start of his tenure may choose to overcompensate by proving his inflation fighting bona fides at the risk of pushing the economy into a recession. For now however, the market dismisses such a possibility and focuses strictly on yield, providing temporary boost for the greenback.