German Retail Sales (DEC) (07:00GMT; 02:00EST)
                    (MoM)   (YoY)
Consensus:    1.2%    0.8%
Previous:       -0.7%   -0.5%

Outlook: Retail sales activity in Europe’s largest economy is expected to mark its biggest monthly rebound in seven months in December. Economists predict a 1.2 percent jump in purchases for the first increase in four months. Domestic spending is expected to ramp up across the board in Germany as businesses and consumers look to avoid January’s VAT tax. In addition, the strong employment trend has lined pocket books and boosted confidence. In November, unemployment dropped by 108,000 people and in turn cut the jobless rate to a four-year low 9.8 percent. Furthermore, outside of the economic numbers, Germany has enjoyed its warmest fall on record, encouraging consumers to go to the store. The best source forecasting the government’s retail numbers though is likely the recently released PMI figure from Bloomberg. The gauge held above 50.0 in December at a lofty 55.2. However, looking further ahead, January retail sales reports could be in for significant declines as retail PMI figure for that month plunged to 43.9 – the lowest since March 2006 – signaling contraction and boding ill for the sector in the first quarter of 2007.

Previous: Retail sales in Germany unexpectedly fell 0.7 percent in November – marking the third consecutive monthly decline – bringing the annual non-seasonally adjusted rate to -0.5 percent. The only areas that saw a boost in sales were in the auto and home-improvement sectors. The drop in the headline figure came on concerns that increases to the value-added tax will reduce households' disposable income, subsequently restraining consumer spending. Also taking a hit was consumer sentiment, as the GfK confidence report for January dropped more than estimated to a reading 4.8 from 8.5 the month prior. However, the slowdown in consumption could only be temporary, as strong economic expansion and steady export growth should keep unemployment at a four year low of 9.8 percent.

Canadian Gross Domestic Product (MoM) (NOV) (13:30 GMT; 08:30 EST)
Consensus: 0.3%
Previous: 0.0%

Outlook: Growth in the world’s eighth largest economy is expected to accelerate in November. If the economy is able to meet expectations, it would be the first record of positive growth in three months. Using the sector data from the same period, key strength is expected from the consumer and housing sector. Canadians have enjoyed a low unemployment and strong wage growth for the past few quarters. However, the catalyst for spending may have been the sharp contraction in energy prices through the November. For the same period, retail sales grew 0.2 percent while auto sales rise 3.0 percent; both gauges advancing for the first time since August. Reaping the benefit of a liberal consumer, November housing starts grew to 229,100 units as aggressive hiring in certain regions of the country, like Alberta, have led to shortage of available residences for a wealthier, migrating population. All else aside, the true strength of the Canadian economy for through the month may hinge on manufacturing performance. Indicators tracking the fickle sector have been mixed as cheaper commodity prices and a relatively expensive currency thwart demand that has developed from a surprising rebound in US consumption. Acting as a red flag, the Ivey Purchasing Managers’ Index dropped to 52.8 for its lowest print for the year. On the other hand, trade levels are encouraging. Factory shipments grew 2.3 percent over November, the most in 15 months, while the physical trade surplus grew to C$4.667 billion. Should Canadian growth pick up going into the end of the year, the BoC’s ability to cut interest rates will be distinctly reduced.

Previous: Canada’s economy failed to growth for the second month in a row in October, the first such incidence of back-to-back stagnation since April of 2003. For the month, domestic spending was undercut by weak demand from the US, which reported modest 2.0 percent expansion of its own in the third quarter. The pressure for the month was felt mostly in the factory and consumer sectors. Since an estimated 85 percent of all exports Canada produces are consumed by the US, controlled spending from south of the boarder hit manufacturers the hardest. The sector contracted for the third consecutive month in October, arousing the terminology of a recession. Back at home, Canadian’s couldn’t spend fast enough to keep some sectors of the economy in the green. Retailers suffered an industry-wide 0.5 percent drop in value, while wholesalers marked their own 0.8 percent slide. As the Canadian economy struggles to find its footing, BoC Governor David Dodge’s assertions that the dip is both ‘mild’ and ‘temporary’ seem premature.

US Gross Domestic Product Annualized (4Q A) (13:30 GMT; 08:30 EST)
Consensus: 3.0%
Previous: 2.0%

Outlook: All eyes will turn to tomorrow’s GDP report, as a strong wave of fourth quarter data places great pressure on headline economic growth to impress. The outlook for the world’s largest economy has clearly shifted in the past several months, with consensus figures now pointing to the strongest expansion rate since the stellar Q1 5.6 percent print. Risks to financial domestic assets arguably remain to the downside, however, with such heightened expectations leaving ample room for disappointment. For the dollar, this means that any marginal slip could shove it off of recent 3-month highs. If it impresses, on the other hand, traders will likely hold back substantive dollar buying until the afternoon’s FOMC Interest Rate decision. Forex markets are in for a wild ride, as two top-tier economic releases promise to shed a floodlight on underlying Greenback fundamental strength.

Previous: Dollar bulls were disappointed to see that third quarter US growth was revised lower through December, leaving it at its slowest since Q4 2005. A historically weak figure still allowed for modest growth, however, as many touted the official 2.0 percent growth rate as the backdrop for a “Goldilocks Economy”. At over three percentage points below the Q1 pace, the third quarter number reflected a much more sustainable growth path than previously seen. Some said that this would allow the US Federal Reserve to maintain a much more neutral stance on monetary policy, with the potential for cutting interest rates through year-end 2007. Since December’s report, however, we have seen a significant strengthening across key sectors of the world’s economic giant—with specific emphasis on strong Services and Consumer Spending figures. This leaves considerable pressure on both the upcoming GDP figures and tomorrow afternoon’s FOMC Interest Rate Decision.

Federal Open Market Committee Rate Decision (19:15 GMT; 14:15 EST)
Consensus: 5.25%
Previous: 5.25%

Outlook: The Federal Open Market Committee in the Federal Reserve is expected to leave the overnight lending rate in the US undisturbed at 5.25 percent for its fifth consecutive meeting. However, the real interest attached to the conclusion of the two-day meeting lies with the brief statement that policy makers release along with the decision. In the past few months, speculation surrounding monetary policy has shifted dramatically. At first, the market consensus called for at least one rate cut by the end of the first quarter. That outlook was revised to see a 75 percent chance of one cut by the close of 2007; and now there is less than a 50 percent chance of that happening according to short-term interest rate futures. The dramatic reshaping of the masses predictions have come on the basis of surprise economic and inflation data. Considering price growth, the Fed has stuck closely to its concerns of a return in volatile energy prices and strong core inflation. Suggesting the same rhetoric is in store, the annual measurement of December CPI accelerated from 2.0 percent to 2.5 percent, while the core number stabilized at 2.6 percent. More likely to warrant a revision to the text are recent growth indicators. Housing, one of the central bank’s biggest concerns for the US economy, printed strong numbers across the board over the past month. Should the policy body feel comfortable in projecting a bottom in the worst housing slump in 15 years, a serious barrier will be lifted for a hawkish outlook. Elsewhere, the consumer sector is keeping the pressure consistent. Unemployment in December held near a five-year low after hiring managers took on 167,000 new applicants. Squashing any inkling that employment would not leak into inflation, annual wage growth measured 4.2 percent for the second consecutive month in December while consumer confidence has hit a four-year high and retail sales continue unabated. If currency traders find a hawkish revision in the Fed’s statement Wednesday, the dollar may find a boost as shorts put on to take advantage of a possible cut are lifted.

John Kicklighter is a Currency Strategist at FXCM.