Euro-zone Retail PMI printed far worse then the month prior dropping below the important 50 boom/bust line for the first time since February. The French reading dropped from 58 6 to 50.1 confirming the unexpected drop in French consumer spending reported earlier last week. However, the true surprise in the report was the very weak results from Germany. German PMI saw a huge collapse from 55.6 to 47.3. Retailers blamed the drop on the inclement weather between April and May, expecting better demand as the summer progresses. Nevertheless, tonight’s news must a concern to euro longs as it highlights the underlying weakness of the Euro-zone recovery – the consistent disappointment in consumer demand.

The nearly 30% hike in German Value Added Taxes introduced at the start of this year has clearly hampered retail sales in the region despite significant improvements in the country’s labor markets and industrial sector all buoyed by strong export demand. As we noted yesterday, “we believe the key to any future ECB rate hikes after the increase in June will be driven by the data from the consumer sector and to that end this week’s German Retail Sales which have been a sore disappointment all year long will be the key to determining the possibility of rate hikes beyond the 4% barrier. “ Given tonight’s decidedly lackluster data from Retail PMI the prospect of any further ECB rate hikes after expected June bump to 4% appear murky at best despite the persistently hawkish rhetoric of the European monetary authorities.

Meanwhile in Japan, the yen gave back all of its gains from yesterday even as the Shanghai index dropped by 6.50% overnight as Chinese authorities raised the stamp tax on stock transactions. The culprit for yen’s weakness was the sharply lower Industrial Production data which contracted by -0.1% vs. 0.5% expected gain. The decrease was blamed on the slowdown in US consumer demand and raised doubts about the sustainability of the Japanese recovery. Coming only a day after strong employment and consumer spending data, tonight’s weak IP results demonstrated Japan’s continued vulnerability to the US market. Although China is now Japan’s number one trading partner, US remains a key market for Japanese exports and tonight’s economic news raised concerns in the currency market that a slowdown in US consumer demand could stunt future growth in the land of the rising sun once again forcing the BOJ to maintain its neutral monetary policy for longer than it desires.

Boris Schlossberg is a Senior Currency Strategist at FXCM.