Euro Open: Falling Growth, Slower Inflation Call for ECB Rates Cuts.

The Euro consolidated around the 1.40 level in overnight trading. Sterling managed a bit of upside but failed to meaningfully test above the 1.76 hurdle. New Zealand's Retail Sales underperformed, supporting the case for more rate cuts. Japan's gross domestic product shrank in the second quarter, formally putting the world's second-largest economy into recession. Fundamental data to be released in the Euro session is set to again present a strong argument for the European Central Bank to cut rates and check the slide in growth.Key Overnight Developments • New Zealand Retail Sales underperform, support more rate cuts • Japanese economy formally in recession as growth shrinks in the second quarter Critical Levels The Euro consolidated around the 1.40 level in overnight trading. DailyFX Senior Currency Strategist Jamie Saettele sees a retracement through 1.4428 as indicative of a larger advance into the 1.48-1.50 area. Support is seen at 1.3918, with near-term resistance at 1.4036. Sterling managed a bit of upside but failed to meaningfully test above the 1.76 hurdle. Support is seen at 1.7629, while resistance is at 1.7629. Asia Session Highlights New Zealand's Retail Sales disappointed in July, falling -0.8% versus -0.3% expected. June's result was also revised lower to 0.1% from the originally reported 0.9%. The release bolsters the case for aggressive interest rate cuts from the Reserve Bank of New Zealand to check the economy's rapid slide into deeper recession. Yesterday saw policy makers deliver a 50 basis point cut to benchmark rates where only a 25-point cut was forecast. The bank also revised down its growth forecast for GDP, saying the economy probably shrank -0.2% in the second quarter and will contract -0.3% in the three months to October. Bank Governor Alan Bollard put it plainly, saying "We're in a loosening mode [and] we've got room to move." The final revision of Japan's second-quarter Gross Domestic Product confirmed that the world's second-largest economy shrank -0.7% in the second quarter. The economy lost -0.6% in the first three months of the year, meaning Japan is now officially in recession (by definition, a recession refers to two consecutive quarters of negative economic growth). The Bank of Japan will likely stick to a loose monetary policy, keeping borrowing costs unchanged at 0.50% until late 2009. Policy makers hope this will encourage spending as well as help export demand by keeping the Yen relatively cheap against higher-yielding currencies. The Japanese Yen remained virtually unaffected by the announcement as trends in risk sentiment continued to trump fundamental data in driving forex price action. Euro Session: What to Expect France's Consumer Price Index is expected to see headline inflation slow to 3.6% in the year to August from 4.0% in the preceding month. The release will mark the first substantive decline in inflation since CPI began a break-neck rise that would see price growth accelerate over 200% in the last 12 months. The recent decline in oil prices has seen profound easing in inflationary pressure. Indeed, yesterday saw German Wholesale Prices lose -1.8% in August versus -0.2% expected. Euro Zone Employment will likely continue to decline in the second quarter as firms cut back labor force expansion plans on expectations of slowing global demand. Employment grew a modest 1.6% in the year to the first quarter, the slowest in two years. All told, the fundamental picture continues to present a strong argument for the European Central Bank to cut borrowing costs to check the slide in growth. As we wrote yesterday, the European Commission revised its GDP growth forecasts down to 1.3% from 1.7% in 2008 while the ECB called for GDP to expand between 1.1 to 1.7 percent in 2008 and 0.6 to 1.8 percent in 2009 last week. Bond yield forecasts call for a 25 basis point cut in the first quarter of next year and another equivalent cut in the three months to July. To contact Ilya regarding this or other articles he has authored, please email him at [e-mail].

2008 Al Bawaba (Albawaba.com)

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