Euro Falls Below 1.550 As Services And Consumption Contract

Daily Forex Fundamentals | Written by DailyFX | Aug 05 08 10:25 GMT |

Talking Points

* Japanese Yen: Volatile ahead of FOMC Decision
* Euro: Falls Below 1.550 As Services And Retail Sales Decline
* British Pound: Mixed Data Reverses Earlier Losses
* US Dollar: FOMC Decision on tap

Euro Falls Below 1.550 As Services And Consumption Contract

The Euro fell below the 1.550 handle for the first time since June 24, as short interest built ahead of the retail sales release. The EURUSD had been in a steady decline since the U.S. trading session which accelerated throughout the Asian trading session. The majority of the downward move came before a PMI service final reading confirmed that the sector contracted in July for a second month, with a reading of 48.3 - the lowest since June 2003. Meanwhile, retail sales in the region fell 0.6% in July and 3.1% on an annualized basis.

Consumer consumption and the service industry constitute the majority of GDP, and the weakness in these sectors reinforces the notion that the regions economy is softening. Rising food and gas prices have sapped consumer spending power, which led to a 4.4% decline in food, drinks and tobacco sales, with countries like Spain extending their streaks of negative sales to over five months. Meanwhile, the service sector remained ion contraction despite Germany maintaining expansion. However, Europe's largest economy weakened to 53.1 versus the 53.3 initial reported. The ECB is expected to keep their bench mark rate oh hold at 4.25% at Thursday's policy meeting, but if President Trichet hints at losing focus on price stability, Euro weakness will continue.

After trading lower throughout most of the overnight sessions reaching as low as 1.9530, the pound found support as the PMI service report printed better than expected at 47.4 against 46.6. However, the sector continues to remain in contraction, despite an improvement in outstanding business and easing input and output prices. The decline in prices will be welcomed news for the BOE which has been contending with inflation above their 3% threshold, while the economy inches towards a recession. Indeed, manufacturing fell another 0.2% in June after a 0.5% decline the month prior, and lower than the 0.3% rebound expected. Slowing growth should keep the BoE on hold at Thursday rate decision.

The FOMC policy meeting today will be the focus of all markets, as traders look for cues to whether the central bank is ready to embark on a tightening policy. The general consensus is that the easing cycle has ended for the MPC and that it is just a matter of time before they raise rates. Indeed, the fed fund futures are pricing in a 30% and 40% chance that the central bank will raise rates in September and October respectively. However, the softening labor market and continued weakness in the housing sector is expected to keep the Fed on hold today. Therefore, the Chairman's' comments pertaining to the downside risk of the economy will be the event risk of the day.

DailyFX

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