Lukewarm German IFO data and comments from ECB President Mario Draghi have helped stall the recent EURUSD rally just below stern resistance at the 1.36 level.
The euro (EUR) weakened a bit today in early-European dealing after the German IFO data slightly missed expectations, but still managed to show a small increase. The IFO survey came in at 107.7, which was a bit worse than the 108.4 expected, but still better than last month's reading of 107.6.
The current assessment component of the IFO survey showed a decline of 111.4 from 112.0 prior, while business expectations printed at 104.2 versus 104 forecast. The mixed nature of the IFO readings suggests that the German economic recovery continues to expand, albeit at a snail's pace.
Yesterday's dip in the PMI manufacturing report showed that the sector is now starting to experience some headwinds as demand from emerging markets declines, and today's tepid IFO readings confirm the cautious landscape.
The EURUSD dipped from a pre-news high of 1.3515 to trade as low as 1.3490 in the aftermath of the release. The pair has seen a very strong rally in the wake of last week's announcement by the Federal Reserve to delay tapering of asset purchases, however, it appears to have found stiff resistance just below the 1.3600 level and may now drift lower on some profit taking.
Furthermore, Eurozone monetary policy officials are no doubt displeased with the current exchange rate of the unit, as its recent rise hampers export growth in both core and periphery Europe.
Yesterday, European Central Bank (ECB) President Mario Draghi took the opportunity to talk down the euro by stressing the potential for further rate cuts, as well as another round of LTROs. The Fed's actions cannot be taken in a vacuum, and as long as US monetary officials continue to accommodate, the rest of the G-3 is likely to respond in kind.
In North America today, the economic calendar is very quiet with only the housing price index and consumer confidence on the docket, while in Canada, the market will get a look at the retail sales numbers. The consensus calls for a rebound of 1.0% from -0.6% the month prior.
As the week progresses, the focus will begin to shift to politics as US budget issues will likely dominate market sentiment. For now, the session is setting up for possibly more profit taking in high-beta currencies with shorts targeting 1.3450 in EURUSD and 1.5950 in GBPUSD as the day unfolds.
By Boris Schlossberg of BK Asset Management