Euro Falls despite Strong Consumer Spending Data from Germany and France

The euro is retreating once more on Friday despite better than expected consumer spending data from Germany and France. Presently, the euro trades around $1.4286 against the U.S. dollar, or 0.34% below its previous close, and around ¥110.80 against the Japanese yen, or 0.49% below its previous close. The euro failed to find support, it seems, in better than expected performance of the Eurozone's two largest economies. According to the Federal Statistics Office, Germany's retail sales surged 6.3% in June from -2.5% in May. Most analysts were expecting a much milder rebound of 1.7%. The June value is also the largest monthly increase since the country's unification in 1991. Germany is the main locomotive of the Eurozone recovery. Strong consumer spending will be seen as an encouraging sign for the whole Eurozone, as there are few signs that the German economic recovery is losing steam. In fact, quite the contrary, analysts will be hoping that German consumers might provide a boost to other countries' recovery. Strong performance by Germany was matched by France, as its consumer spending rose for the first time in four months. According to Insee, French consumer spending rose 1.1% in June from -1.2% in May. Most analysts had expected a weaker rebound of 0.8%. France is the Eurozone's second largest economy. It is also considered to be a part of the strong Eurozone center. However, its economy has been losing steam recently and the consumer spending figures will be hailed by analysts as France's economic recovery shows signs of life once more. It would probably be too optimistic to expect Germany alone can pull the Eurozone periphery out of the doldrums. However, Germany and France together have a much bigger chance of putting the Eurozone recovery on firm footing. Perhaps even more importantly, the Spanish economy is starting to show signs of recovery. According to the latest government data, the Spanish unemployment rate fell in the June quarter to 20.9% from 21.3% in the March quarter. Spain currently holds the record in unemployment among the Eurozone nations and analysts will be hoping that the Q2 unemployment data signals the end of a period of rising unemployment. Spain is the Eurozone's fourth largest economy. It is also one of the prime candidates for the next bailout. Its banking sector remains weak, as the latest stress test showed, and traders have been pushing Spain's borrowing costs higher and higher. Lower unemployment may translate into higher consumer spending, which should provide a desperately needed boost for the ailing Spanish economy. Strong economic data was not enough to shake off traders' pessimism about the debt reduction prospects on the Eurozone periphery. Rating agencies are continuing their crusade against the debt ridden countries like Greece, Ireland and Portugal, with Cyprus the latest country added to their list of credit rating reductions. At the same time, Italy, the Eurozone's third largest economy, had to pay much higher interest rates to sell its bonds. On Thursday, Italy issued €3.5 billion worth of 3-year bonds, for which it had to agree a 4.8% interest rate, up 1.1% from June. The euro's fall against the U.S. dollar would probably be much steeper if the world's leading superpower is not fighting its own debt reduction battles. Thursday gave another blow to the hopes of a compromise between the two sides as voting on John Boehner's plan in the House of Representatives was rescheduled due to a mounting resistance from the Tea Party movement. It seems the Tea Party movement is prepared to push the U.S. into default if they do not get things their way, and the moderate Republicans are having increasing difficulties in controlling their more radical wing. Some analysts are still hoping the two sides will find a last minute solution, but it seems the U.S. lawmakers are heading for a very long weekend. If the U.S. debt ceiling is not raised, the U.S. government might run out of money by August 2. ACTION ITEMS:

Bullish:
Traders who believe that strong growth in the Eurozone center will eventually trickle down to the periphery, which should provide a lot of steam for the euro, might want to consider the following trades:

• EUR/USD Exchange Rate ETN ERO is a long play on the euro. ERO may rise if the euro appreciates.

• Market Vectors Double Long Euro ETN URR is another long play on the euro. However, URR should rise more than ERO if the euro appreciates.

Bearish:
Traders who believe that the problems of the Eurozone periphery are too big for Germany and France to handle may consider an alternate positions:

• ETFS Short Euro Long US Dollar ETC (Sterling) ETF (SEUP) is a short play on the euro. SEUP may rise if the euro depreciates.

• ProShares UltraShort Euro ETF EUO is another short play on the euro. However, EUO should rise more than SEUP if the euro depreciates.

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