German Business Confidence Falls, Sends Euro Below 1.5750

[DailyFx]

Talking Points
• New Zealand Dollar: RBNZ Holds Rates At 8.25%
• Japanese Yen: Exports Grow at Slowest in Three Years
• Euro: German Business Confidence Falls On Strong Euro
• Pound: U.K. Retail Sales Fall For First time in Three Months
• US Dollar: Durable Goods on Tap


The German IFO Institute reported the first drop in business confidence in four months. The gauge saw declines in all three components with the business climate index falling to 102.4 from 104.8; current assessment to 108.4 from 111.5 and expectations to 96.8 from 98.4. The Euro fell nearly 100 points on the news from 1.5835 to 1.5739 before finding support.

German businesses are feeling the effects of record oil prices and a strong Euro. Despite their waning confidence, many believe that the economy remains robust and that it is headed for a period of moderation versus a significant slowdown. Despite the drop in confidence, don’t expect the ECB to alter its hawkish stance with yesterday’s improvement in Eurozone’s PMI and the recent rebound in the current account from a deficit to a 4.3 billion dollar surplus. Although many feel that a slowdown in Europe will alleviate inflationary pressures, there has been a significant amount of rhetoric regarding inflation concerns and possible rate hikes emanating from the MPC. However, many members including Bonello today have looked to diffuse any speculation of an increase in future interest rates, which may start to weigh on the Euro.

U.K. retail sales fell 0.4% in March from 1.1% the month prior, the first decline in three months. The year-over year figure fell to 4.6% from a revised 6.3%, but better than the 4.3% that was expected. The slumping housing market has started to weigh on consumer confidence and curb their spending. The BoE has recently infused £50 billion into the market in an attempt to free the sticky credit markets, so that banks can give loans to borrowers seeking to buy homes. The central bank has continued to warn of the ongoing downside risks to consumer spending and the housing industry, and may need to cut rates further if current measures fail to stabilize the market. The Pound was relatively unchanged on the news, as it has started to consolidate between 1.9750 and 1.9800 after yesterday’s sell off.

The New Zealand central bank left rates unchanged at a record high of 8.25%, as inflation remains a concern. Governor Allan Bollard stated “We expect that the official cash rate will need to remain at current levels for a time yet”. The remarks were far more dovish than previous statements and leads to speculation that a rate cut may come by the end of the year. Record interest rates and a strong currency combined with the headwinds generated by the U.S. subprime crisis is slowing growth faster than the MPC anticipated. The Kiwi has found support at .7910 after dipping from 0.8000.

U.S. Durable Goods are expected to rebound from a 1.7% drop the month prior. The 0.1% expected increase is nearly flat and not something that will excite the markets. A more significant rebound may foster some dollar bullish sentiment, especially since speculation has risen that the Fed will pause their easing policy after their next meeting. However, further declines may signal the economy is far from reaching a bottom and may spark bearish sentiment.

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