Euro Drops as Consumer Spending Contracts (page 2 of 2)

Fundamentals, technicals and sentiment all support further losses in the Euro.

The one thing that could have triggered a meaningful turn in the single currency was reasons for the European Central Bank to cut interest rates. If economic data deteriorates even further, the central bank may have to seriously consider this possibility.

The futures market currently does not expect an interest rate cut until the end of this year at the earliest. Anything to suggest otherwise could cause more volatility in the Euro. German unemployment is due tomorrow and we expect the employment numbers to be Euro negative.

Sterling declines as CBI Index hits lowest level in 16 Years

Like the Euro, the Sterling has been hit by weaker consumer spending. The CBI distributive trades survey dropped to the lowest level since November 1992.

Although the Easter holiday and poor weather affected consumer spending, the primary reason why consumers are tightening their belts is the weakening housing market.

Conditions will be challenging going forward, which could force the Bank of England to cut interest rates again despite growing inflationary pressures.

This morning, BoE Governor King said that inflation will hold near their 3% target for longer than initially anticipated. These hawkish comments conflict with the sharp drop in mortgage approvals and the possibility of major layoffs in the UK in the coming months.

New Zealand and Australian Dollars Sell-Off, Canadian Dollar Holds Steady

Yesterday we said that the rallies in the New Zealand and Australian dollars were unconvincing. Unsurprisingly the moves have reversed themselves.

The biggest mover was the New Zealand dollar which dropped 1.2% against the greenback. The country's trade surplus turned into the deficit last month, which was only the second time in the past 10 years that New Zealand reported a deficit. We had called for a weaker number in yesterday's Daily Fundamentals, given the sharp drop in the Purchasing Managers Index.

The Australian dollar also came under selling pressure as business confidence dipped into negative territory in the first quarter.

The Canadian dollar was the only commodity currency to rally even though we think that weakness will resume in tomorrow's GDP report. Retail sales have been weak, which points to softer GDP growth in the month of February.

Weakness seen in all Japanese Yen crosses

All of the Japanese Yen Crosses have sold off today with the biggest drop seen in GBP/JPY and NZD/JPY. Stock market traders are treading carefully ahead of the FOMC rate decision while the move in the Yen crosses confirm that some traders are lightening up on risk.