US Retail Sales Fall Unexpectedly, along with UK's Hope for Speedy Recovery

USD

The Dollar rallied late Wednesday after US retail sales showed a .4% decline against what was widely anticipated to be a flat outcome. The Dollar had been down most of the session after a report in the Financial Times said that the US could lose its AAA credit rating. However, renewed fears about the state of the economy were sparked by the sales data, pushing safe-haven flows back into the dollar and lifting the USD out of a four month low against a basket of currencies and a seven week slide against the Euro.

At 11:00PM GMT, the Dollar was up .4% to the Euro to 1.3592, down 1.2% to the Japanese Yen to 95.25, up .8% to 1.5152 versus the Sterling, up 1.16% against the Canadian Dollar to 1.1762 and up 1.75% to the Australian Dollar to .7515.

GBP

The Bank of England announced that they expect a slower recovery than originally predicted. The BOE revealed that inflation remains below the target level and that suggests that the loose monetary policy of the BOE will remain in effect for now. The figures showed a 4.5% decrease in economic activity for the second quarter and predict an early 2010 recovery. UK interest rates remain at a record low .5% and the British government recently expanded their asset purchasing program to 125 Billion Pounds, however Mervyn King, the BOE Governor said that the recovery will be slow and uncertain, highlighting this by declaring "We may get a recovery that will prove to be sustained and then again we might not."

At 11:20PM GMT, the Pound Sterling was down .4% to the Euro to .897, down .7% to the Swiss Franc to 1.6769, down 2.1% to the Japanese Yen to 144.33, up .2% to the Canadian Dollar to 1.78 and up .9% to the Australian Dollar to 2.0145.

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Chart analysis USDCAD

Equity Updates

Equities have taken a beating overnight after recently doing an amazing job of showing resilience lately in the face of some very ugly data, but it appears that last nights bailout package failure is serving as a reality check. Note the weekly initial jobless claims number out of the US yesterday, which, at 573k shows an alarming further acceleration in job losses from already elevated levels. Today we have US Retail Sales and the news will inevitably be bad there (expectations already looking for only slightly better than last month's near record drop). Seems like the complacency in the market has been shaken a bit here and we risk larger moves again in currency-land - beware the volatility and stay careful out there.

Charts: USDCAD

USDCAD: CAD could be at the epicenter of market activity today due to CAD's sensitivity to the US auto industry. Yesterday saw the technical capitulation below the very clear 1.2450 line of support, but now we've already back above that level again this morning. We'd still like to see the pair close today back above the 1.2550 level to call a full reversal here, but the way winds are blowing at the moment, we may be setting up for a test of 1.3000+ here soon if the mood across markets remains sour. Energy prices are another variable worth watching in this equation.