EUR flows: EUR supported by strong German retail sales
EUR retains a mild positive bias after strong German retail sales data
German retail sales have come in on the strong side in September, increasing the impression given by yesterday’s GDP data that the German economy is showing signs of life. The trend in retail sales is clearly improving, and if the weak consumption trend we have seen of late turns around, it bodes well for German and European growth going forward. However, the market is no longer pricing any risk of a 50bp ECB rate cut in December. Indeed, it isn’t quite fully pricing in a 25bp cut, so there is now quite limited scope for EUR yields to rise, and with front end yield spreads still suggesting some downside risk for EUR/USD, we wouldn’t see much scope for EUR/USD gains.
Having said this, as long as European equities perform well, EUR/USD should retain a mild upside bias. Our model based on yield spreads and equities indicates EUR/USD is close to fair at current levels.
