Euro - IFO Spurs a Relief Rally But Will It Hold?

[U][B]Talking Points[/B][/U]

  • Japanese Yen: CGPI shows slowest rise in 5 months
  • Euro: IFO lower but no sharp drop off
  • Pound: Sentence comments on rate cut weigh
  • Dollar: Existing Home Sales on tap

IFO Survey of German Business confidence hit a 19 month low, but the figure did show a sharp drop off from the month prior printing at 104.2 versus 105.8 and that news created a bit of a relief rally in the EURUSD as the pair made another run at the 1.4100 level. ``We see a weakening, but not the end of the recovery, '‘Gernot Nerb, an economist at Ifo, said in an interview today." Overall, it’s still too early to tell.’'
Traders had feared the decline in IFO readings would be even worse given the recent turbulence in the EZ credit markets and the relentless upward march of the euro. For the time being the expansion in the 13 member region continues, but appears to have peaked. It is becoming abundantly clear that EZ businesses are increasingly anxious about the impact of the higher euro on overall growth and while most big concerns including Airbus and BMW are hedged well into 2008, many of the smaller enterprises are feeling the pressure on profits already. This makes it extremely unlikely for the ECB to raise rates further especially if the euro continues to rally.
The recent breakout on the pair found strong resistance in the 1.4100 area and its is doubtful that the pair can propel higher off the IFO news alone. Today the market will digest the latest US Consumer Confidence figures and Existing Home Sales reports. Ironically enough worse than expected results could actually boost the dollar if equities react negatively and EURJPY is liquidated on risk aversion flows.
The yen meanwhile continued to strengthen throughout out the European session as Yasuo Fukuda, was officially elected prime minister by Parliament on Tuesday. Mr. Fukuda?s ascension to the Prime Minister post brings a welcome note of stability to the recent turmoil in Japanese politics and eliminates some of the negative uncertainty that surrounded the currency over the past week. For more on our analysis of the Fukuda election please go here.