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Will Weakening European Retail Sales Weigh The Euro Lower?
By Terri Belkas | Published  05/28/2008 | Currency | Unrated
Will Weakening European Retail Sales Weigh The Euro Lower?

The upcoming Euro-Zone Retail PMI reading will give us some insight into the resiliency of the European consumer. In April the indicator posted at the lowest level in its history which began in January, 2004. The 41.8 was a sharp drop from 48.2 in March for consecutive months below the 50 boom/bust level as the sector continues to contract. European consumer demand will be the critical component in determining whether the region can avoid a significant downturn. The strong Euro has made European goods less competitive abroad and sales continue to slow. The recent Euro-Zone current account showed a drop of over nearly six billion in inflows from goods sold. Companies are already battling rising raw materials and oil costs which continue to erode profits, leaving domestic demand as the last hope for growth. The labor market has remained strong with German unemployment expected to fall to 7.8% from 7.9% with the total unemployed expected to decrease by 25,000. As long as employment remains strong retail sales can potentially rebound. However, if hurting companies start to cut jobs, country leaders will begin to call for the ECB to abandon their hawkish stance.

Bonds – 10-Year German Bund Futures

Bunds fell below major support at the December low, as any near term rebound for the contract is increasingly diminishing. A decline in the upcoming consumer consumption data may provide some support for bonds as faltering domestic demand will increase risk aversion. Conversely, a rebound in retail sales will send bunds lower to test the October low of 111.54.

FX – EUR/USD

A deep deficit in the Euro-Zone current account and a better than expected print in U.S. durable goods orders, weighed the EURUSD below 1.5700. The pair had been trading in an upward channel since it tested 1.530 on May 8th, but the fundamental data has the pair threatening trend line support with the 20 Day SMA at 1.5563 as its next level. After the recent current account deficit traders will be watching the upcoming Retail PMI to see of the other major source of growth for the economy is continue to weaken. A rebound in retail sales may lead to the pair resuming its recent path toward 1.600 with 1.580 as a significant resistance level. Meanwhile, continued weakness in the sector may sink the Euro further and put dollar bulls back in charge.

Equities – Xetra DAX Index

The Xetra DAX index has found support at the 100 Day SMA after rising oil prices weighed equities lower. The recent easing of oil has lead to an equities rally as expectations are that demand will continue to slow in the face of rising prices, ultimately driving prices lower. The upcoming retail PMI print may have significant influence over equities price action as consumer demand is the main driver of company profits. Continued weakness in retail sales may send stocks lower as growth prospects will be significantly reduced, especially with demand from abroad shrinking. Conversely, a rebound in retail and the expected continued strength in the German labor market should have the index looking to test resistance at the 200-day SMA.

Terri Belkas is a Currency Strategist at FXCM.