Talking Points

• Japanese Yen: Holds the 108.00 level as traders eye US session
• Euro: breaks 1.4850 as IFO prints to the upside
• Pound: Follows euro higher
• US Dollar: PPI, Consumer Confidence on tap

The German IFO Survey for business confidence unexpectedly rose for the second consecutive month in February, rallying the EURUSD over 50 points to retest recent resistance at 1.4850. The index increased to 104.1 from 103.4 in January against a forecast of 102.9, suggesting that Europe’s largest economy is be able to grow despite the challenges of a U.S. downturn, higher oil prices and a strong currency.

The news tonight should bolster the hawkish position of the ECB and provide further support for the argument that the European economy has decoupled from the U.S. We stated last week that the IFO could make or break the EURUSD this week and tonight’s news clearly “made” the euro longs position imbuing them with confidence. We noted yesterday that, “We believe that the price action (in EURUSD) is much more indicative of consolidation rather than exhaustion. Just as the NZDUSD spend several months warily circling the 8000 level before finally breaking through on Thursday, so too the EURUSD is likely to continue to churn before making a decisive move higher. “

With the break of the key resistance level of 1.4850 the pair is now on the way to challenge the psychologically important 1.5000 level. Ironically enough the pair’s test of that key barrier is not predicated on additional negative news from the US. In fact if US data, begins to surprise to the upside, indicating that the US economy has only slowed but not actually contracted, risk appetite is likely to return to capital markets providing a conducive environment for further EURUSD gains.

With renewal of risk assumption the EURUSD is likely to benefit from carry trade flows. Tonight’s IFO data should put to rest any fears on an imminent rate cut by the ECB and that in turn should make EURJPY the pre-eminent carry trade in the currency market. Therefore, if during the North American session, the Consumer Confidence data prints better than forecast, leading to further stock market gains the EURUSD could see continuation of today’s early morning rally.

Did IFO kill any chance of an ECB rate cut this quarter? Join us in the EURUSD forum