Weak US Retail Sales Could Send EUR/USD Back Towards 1.30

US Dollar

The US dollar started the new week firmer as it attempts to recover some of last week's losses. On a day devoid of any important US economic data, the clarification of China's reserve diversification plan along with the rally in the stock market and bullish Fed comments has helped the dollar move higher. Interestingly enough, most recent comments from Federal Reserve officials have been hawkish.

These are primarily directed at inflation its upside risks over the next few months. This is important to keep in mind since there are at least six different Fed officials speaking this week. Even though Fisher did not touch on monetary policy this morning, his comment that Texas economic growth is outstripping India can only be construed as exceptionally bullish. In addition to Fedspeak, there are a number of very important economic data due for release from not only the US, but also the rest of the world this week, starting with tomorrow's retail sales and producer price index.

Over the past few months, PPI has not been particularly market moving and especially since it is predicted to be tame as the drop in oil prices pushes global inflation lower. The more important release will be retail sales. Even though lower oil prices should help to boost spending, at the same time it also reduces gasoline receipts.

Furthermore department store and chain store sales have not been particularly strong. Spending data from MasterCard and Reuters is also suggesting a softer read. If consumers really did cut back spending in the month of Oct, expect to see the dollar's slide resume. The dollar's weakness is far from over and today's rise is most likely a hiccup in an overall downtrend, even if this hiccup manages to last for a few more trading days.

Euro and Swiss Franc

Trading tomorrow will essentially be a battle between the US and Europe to see who doles out the biggest disappointments. US retail sales is one of the most important market movers for the US dollar, but by the same token, the German ZEW survey is also one of the Eurozone's most important economic releases. Usually US data always wins out, but in addition to the ZEW survey tomorrow, we are also expecting German GDP, CPI and Eurozone GDP. Even though the ECB stands behind their plans to increase interest rates again this year, tomorrow's reports are forecasted to show a slowdown in both growth and inflation. Economic weakness in France has a number of analysts skeptical about whether another rate hike by the ECB is truly the smart thing to do.

However ECB officials including Gonzalez-Paramo and Liikanen have been quick to relieve some of that fear by saying that French data can be volatile and despite their flat Q3 growth, Eurozone growth as a whole should be around potential this year and next. It sounds like ECB officials are banking on strong German and Italian growth to lead economic activity higher. If this is true, then tomorrow's German and Italian GDP reports run the risk of surprising to the upside.

There is little to expect out of Switzerland this week with a completely empty economic calendar. Both the central bank and the government have a vested interest in seeing the Swiss franc strengthen. A few weeks ago, the Finance Minister expressed dissatisfaction with the weakness of the franc against the Euro. Last week, the Swiss National Bank talked about the possibility of increasing interest rates even if inflation is not a problem to avoid "financial distortions." These are clearly comments stemming from concerns about the currency, especially as Roth warned that the weak franc is importing inflation.

British Pound

Disappointing inflation data has sent the British pound lower. Producer prices dropped by 0.2 percent in the month of October, bringing the annualized pace of growth down to 1.7 percent from 1.8 percent. Core prices were firmer which has helped the GBP/USD hold above 1.90, albeit marginally. The housing market continues to remain very strong with house prices rising by an annualized rate of 8 percent in Sept according to DCLG.

Consumer prices are due for release tomorrow and unlike the rest of the world, economic data should indicate that the UK is still contending with inflationary pressures. The annualized rate should remain comfortably below the Bank of England's 2.0 percent target which will keep the market's expectation for another rate hike early next year intact.

Japanese Yen

The Japanese Yen has lost ground against the Euro and US dollar after a round of disappointing economic data. Both import and export prices softened in the month of October, bringing the Consumer Goods Price Index to a 6 month low. Inflation still remains very low in Japan, which limits the central bank's need to raise interest rates. However Bank of Japan Governor Fukui has been sending out a lot of mixed messages lately.

Most recently, he has said that the market should not rule out an interest rate hike by the end of the year, which was supported by comments from Deputy Governor Iwata. The Japanese government unfortunately is still adamantly against any move by the central bank. LDP policy head Nakagawa and former Finance Minister Takenaka warned against premature tightening of the economy. The age old battle of the BoJ against the Japanese government has led to broad based skepticism about whether Fukui will really have the power to deliver a rate hike this year even if he wanted to. This has attracted carry traders back into their yen short positions.

Commodity Currencies (CAD, AUD, NZD)

Commodity currencies are weaker across the board despite a more optimistic RBA monetary policy statement. The central bank is still worried about inflation and downplayed the recent disappointments in growth. New Zealand's producer prices slowed in the third quarter as the combination of lower energy prices and flat mining related prices cap gains in inflation. Input prices did come out stronger than output prices, which suggest that producers may be seeing their tighter margins.

Meanwhile both the Australian and Canadian economic calendars are empty tomorrow. New Zealand is set to release retail trade data and given the recent weakness in the economy in general, spending is expected to have been flat in the month of September.