US Dollar Declines May Continue as US Retail Sales are Expected to Fall Again

The US dollar was already falling across the majors this morning when the release of US economic data at 8:30 ET suggested that the Federal Reserve will indeed cut rates aggressively next week. First, the US import price index fell by the most since record-keeping began in 1989 at a rate of 6.7 percent during November, bringing the annual rate of price growth to a 6-year low of -4.4 percent. The decline wasn't entirely unexpected, given the strength of the US dollar and plunge in commodity prices. In fact, according to the Labor Department, petroleum import prices plummeted 25.8 percent in November alone. Meanwhile, initial and continuing jobless claims surged to the highest levels since 1982, suggesting that the US unemployment rate could climb further from its 15-year highs of 6.7 percent. The National Bureau of Economic Research (NBER) has already declared that the US economy fell into recession in December 2007, but the labor market data only suggests that the recession will continue through the end of the year and into 2009.

Looking ahead to Friday, the Commerce Department’s release of US retail sales at 8:30 ET is forecasted to fall negative for the fifth straight month in November at a rate of -2.0 percent. Such a decline won’t be entirely surprising given the combination of the jump in the unemployment rate to a 15-year high, the continuing collapse in the housing sector, and persistently tight credit conditions. Later in the morning, the preliminary reading of the University of Michigan’s consumer confidence survey is forecasted to fall even further to a 28-year low of 54.8 in December from 55.3. Traders should beware that while this report has a 10:00 ET official release time, it tends to hit the wires a few minutes early, which can sometimes spark a bit of a “surprise” factor in the markets. Overall, disappointing retail sales and sentiment figures could weigh on the US dollar, especially as the Federal Reserve is anticipated to cut rates on December 16 by at least 50 basis points to 0.50 percent.

British Pound Falls to Record Low Versus Euro - Will These Moves Continue?

The British pound gained some ground on Thursday thanks to broad US dollar weakness. In fact, GBP/USD was able to break above major trendline resistance at 1.49, suggesting that a bigger bullish retracement may be in store despite the dour outlook for the UK economy. One place where UK fundamentals are hurting the British pound, though, is in EUR/GBP, as the pair hit fresh record highs of 0.8910 on Thursday. The moves helped EUR/USD break above resistance at 1.3070 and rocket higher throughout the day.

Conditions in the Euro-zone are by no means strong, but they are comparatively better than in the UK as the credit crunch has choked off the finance sector that has previously allowed the country to thrive for so long. Furthermore, European Central Bank Governing Council member Axel Weber indicated today that he “would like to avoid” cutting rates below 2 percent, as it would imply that real interest rates were negative. With the ECB benchmark rate already at 2.50 percent, Mr. Weber’s comments suggest that monetary policy will not be made much more accommodative in coming months. In the UK, on the other hand, the Bank of England is anticipated to continue cutting rates aggressively, as BOE Governor Mervyn King has declined to rule out cutting rates to zero in the past. As a result, the odds remain in favor of EUR/GBP strength. Focusing on EUR/USD, Thursday’s rally led the pair headlong into trendline resistance going back to mid-July at 1.3405, but it may only be a matter of time before we see a break above this level to target 1.3750.

Japanese Yen Remains Strong Against Greenback, Intervention Speculation Mounts

The Japanese yen remains exceptionally strong against the US dollar, which is partially a function of broad greenback weakness but also the result of lingering risk aversion, as the DJIA ended the day down 2.24 percent. Overnight, consumer confidence in Japan is forecasted to turn increasingly pessimistic during the month of November, as the index excluding one-person households is likely to drop to the worst levels in at least 26 years, as record-keeping began in 1982. With the Japanese economy already in recession thanks to lackluster consumption and waning foreign demand for exports, indications of weakening consumer sentiment will not bode well for domestic demand going forward. The bigger concern amongst traders though is what will happen if USD/JPY falls below 90. There’s quite a bit of speculation that the Bank of Japan will step in and intervene if this actually happens, and seeing as though they have a long history of doing so successfully, it seems feasible.

Terri Belkas is a Currency Strategist at FXCM.