Euro Heavy Despite Higher German IFO, As ECB Rhetoric Lowers Interest Rate Expectatio

DailyFx · June 22, 2009, 6:00am

The Euro has started to consolidate earlier losses after the German IFO report showed an improvement in business sentiment for the third straight month. The German IFO business climate reading in June rose for a third month to 85.9 from 84.3 signaling that the economy may haved bottomed.

[B]Talking Points
• Japanese Yen: Testing Fibo Zone Support
• Pound: Home Prices Fall for First Time In Five Months
• Euro: German IFO Rises For Third Month
• US Dollar: Finding Support As World Bank Lowers Growth Forecast

[/B][U][B]Euro Heavy Despite Higher German IFO, As ECB Rhetoric Lowers Interest Rate Expectations [/B][/U]

The Euro has started to consolidate earlier losses after the German IFO report showed an improvement in business sentiment for the third straight month. The German IFO business climate reading in June rose for a third month to 85.9 from 84.3 signaling that the economy may haved bottomed. Economists forecasted an improvement to 85.0, but a jump in expectations to 89.5 from 85.9 help offset a slight decline in the current assessment to 82.4 from 82.5. The single currency fell sharply before the release on comments from ECB member Nowotny that the central bank would most likely leave interest rates unchanged until 2010 erasing speculation of a rate hike.

The central bank’s mandate of price stability has led to many traders predicting that they would be the first to start tightening once growth signs emerged. The higher interest rate expectations have provided support for the Euro and with them removed; we could see continued weakness from the single currency. However, an improvement in business sentiment and continuing signs of a recovery could continue to remain a supportive factor and limit the downside risks. Price action has remained in a tight range over the past week with Fibo support and resistance at the 20-Day SMA setting the bounds. We would need to see a break below 1.3798 the 38.2% Fibo level of 1.2884 – 1.4340 to justify a bearish bias, with resistance at 1.4000 looking firm the path of least resistance may be lower.

The pound has seen whipsaw price action after a 0.4% drop in home prices according to Rightmove LLC led to initial weakness. It was the first drop in five months which may be a sign that demand is waning as bargain hunting ends. The GBP/USD fell over 100 pips to as low as 1.6405 at the beginning of Euro trading. However, recent price action has seen a 100 pip bullish spike followed by a sharp reversal. The current triangle formation appears to be completing which could lead to a breakout, and with the dimming outlook for a global recovery downside risks may be the greatest. However, the 20-Day SMA at 1.6283 has remained supportive and until we see a break below there, upside potential remains. The 61.8% Fibo of 1.6707 lies ahead as resistance and a break above would be required to remove my bearish bias.

An empty U.S. calendar could see the dollar take its cue from equity markets today as risk sentiment continues to be a driving force of price action. The World Bankcutting its growth forecast has markets lower in Europe and U.S. futures pointing at a lower open. The global agency cut its GDP forecast to -2.9% from -1.7% stating that a recovery will be subdued compared to a normal scenario. Therefore, we may see the greenback continue to find support heading into the U.S. session and going forward as the outlook for a robust recovery dims.

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