Euro Weighed by German IFO Disappointment, Dollar Finds Support on North Korea Nuclea

DailyFx · May 25, 2009, 6:00am

The Euro has been trading heavy throughout the overnight on geopolitical risks and the German IFO Survey missing expectations. A report that North Korea performed another nuclear test raised security risks for the region and sparked a flight to safety.

[B]Talking Points
• Japanese Yen: Weakens On North Korean Missile Launch
• Pound: Markets Closed For Bank Holiday
• Euro: German IFO Improves, Misses Expectations
• US Dollar: Markets Closed For Memorial Day

[/B][U][B]Euro Weighed by German IFO Disappointment, Dollar Finds Support on North Korea Nuclear Test[/B][/U]

The Euro has been trading heavy throughout the overnight on geopolitical risks and the German IFO Survey missing expectations. A report that North Korea performed another nuclear test raised security risks for the region and sparked a flight to safety. Meanwhile, German business confidence rose for a second month to 84.2 from 83.7 in April but was below economist expectations of 85.0. Additionally the current assessment reading fell to 82.5 from 83.5, versus forecasts of an improvement to 84.5. The EUR/USD fell back below 1.400 to a low of 1.3960. The pair had just reached above the psychological level for the first time since January 2 on growing risk appetite and concerns over the U.S. credit rating.

Although there is building optimism that the Euro-zone economy will soon reach a bottom, it is clear that the current situation continues to deteriorate. The ECB member was on the wires today saying that the current interest rate level is appropriate and the central bank’s monetary policy is giving significant support for the economy. However, the ECB’ s lack of urgency in addressing the downturn could put the economy on a long path to recovery. Although, the central bank may achieve its goal of limiting the upside potential for inflation it remains to be seen if it will lead to a long-term expansion. Therefore, although we may see Euro strength over the short-term, weakness may follow as the European economy lags others in its recovery. A test of the 50.0% Fibo extension of the 1.6041-1.2329 decline is a strong possibility before we start to see the single currency give back its recent gains.

The Yen sharply fell on the North Korean missile launch and after recovering some of its losses has started to come under pressure again. The USD/JPY is trading back above 95.00 but may see resistance at 95.40-the 100-Day SMA. In addition to the geopolitical risk a 2.4% decline in the al industry activity index and comments from Japanese Vice Finance Minister Sugimoto are also weighing on the currency. The high ranking official speaking to the press in Tokyo said that Japan’s economy is in a severe state and deterioration in the labor market has been abrupt.

The Memorial Day holiday in the U.S. should lead to very little volume and volatility unless we see U.S. traders look to hedge against the potential geopolitical tensions from the North Korean nuclear test. If this were the case we could see another bout of greenback support before markets quieted for the remainder of the session. Improving housing and sentiment data throughout the week could fuel increasing optimism adding to recent dollar weakness. However, the major event risk for the week will be Friday’s preliminary GDP report for the first quarter which is expected to show a 5.5% contraction which would be a significant improvement from the initial reading of -6.1%. If we see a shallower than expected decline in growth then we may start to see the dollar begin to garner support on the anticipated U.S. recovery.

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