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Weekly FX Market Outlook: Sales Drop as Confidence Falls

Retail sales in the U.S. probably fell sharply in November, a report from the Commerce Department may show on Dec. 12. Economists lower their forecasts for GDP numbers in response to more signs of a deep and prolonged recession. Recent estimates show that the U.S. economy may contract at an annualized rate of 5 percent in the forth quarter and it would be the second quarter in row that consumer spending negatively contribute to growth.

Broad Spending Fall
Friday’s report on retail sales may also show that cutting back in spending has not been limited to big ticket items but a broad range of products have been affected. Excluding autos, sales are expected to fall as much as 1.7 percent. At the same day, the University of Michigan’s index of consumer sentiment for December may remain close to 55.0, the lowest in nearly three decades.

Global Slowdown
Indexes of industrial and manufacturing production continue to fall in the U.K., Euro-Zone, and Japan; separate reports are expected to show this week. Economic activities increasingly slow around the world, reducing demand for manufactured products both at home and abroad.

As global recession deepens producers response by cutting output and price as well. A report on Monday is expected to show that Producer Price Index in Britain fell again in November after a 1.0 percent decline in the previous month.

While easing inflation could be a support for consumers, it is now the fear of deflation by continuing slowdown in economic activities that affect negatively the market sentiment.

The Bank of England cut the bank rate by 100 basis points last week to 2.00 percent, the lowest since 1951. Asked earlier about the possibility of zero interest rate, Mervyn King said that he is ready to do everything to make it sure that inflation will not remain below the 2 percent target in the medium term.

Politics and Canadian Dollar
Battered by falling oil price and a deep recession in the U.S., the Canadian economy now faces also a political uncertainty. Conservative government led by Prime Minister Stephen Harper struggles to avoid toppling by allied opposition parties and any progress could affect the Canadian dollar. Considering a sizable fiscal package in the rivals’ agenda, this uncertainty may not have those negative effects which are usually associated with instability and uncertain situations.

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