Euro May Gain Against US Dollar on German IFO Survey, Risk Appetite

Key Overnight Developments

• US Dollar Slides Against Japanese Yen Ahead of Bernanke Testimony
• Euro, British Pound Little Changed in Quiet Asian Session Trading

Critical Levels



The Euro drifted higher, but did so within the boundaries of the narrow range below 1.3640 that had been established since the start of the trading week. The British Pound followed suit, edging cautiously above the 1.55 mark but staying close to familiar territory. We remain short EURUSD at 1.4881 and GBPUSD at 1.5765.

Asia Session Highlights



Currency markets marked time in the overnight trading session, with most major currencies drifting sideways, with the Japanese Yen being the only significant mover against the US Dollar as traders looked ahead to Wednesday’s two-day testimony from US Federal Reserve Chairman Ben Bernanke on monetary policy before the two chambers of the US Congress. The central bank set off a sharp USDJPY rally last week as it followed up a relatively hawkish set of minutes from the late-January policy meeting with a surprise increase in the discount lending rate. The pair raced higher as the sudden fear of sooner-than-expected rate hikes pushed traders to exit short-USD carry trades and swap them out for short-JPY positions. The surge in the US interest rate outlook did not prove lasting however January’s US consumer price index figures broadly disappointed, with core inflation (excluding energy and food prices) issuing the first monthly decline in at least 13 years. As we noted in our weekly Japanese Yen forecast, this has encouraged USDJPY losses as traders unwound some of the long positions taken amid last week’s buying frenzy amid expectations that Bernanke will downplay the discount rate hike as “normalization” that is not indicative of a hawkish shift in the US central bank’s outlook.

Euro Session: What to Expect



February’s German IFO Survey of business confidence headlines the economic calendar in European hours. Economists predict a decidedly tame outcome, with the Current Assessment gauge expected to rise by the least in four months while the forward-looking Expectations index issues the first decline in over a year. An upside surprise seems reasonable however after preliminary manufacturing PMI figures outperformed over the same period on an improved export outlook linked to a weaker euro and buoyant demand from Asia. The single currency has declined 4.1 percent to date this year against a trade-weighted basket of its top counterparts.

Separately, the British Bankers’ Association is expected to report that the sum of UK Loans for House Purchase declined for the first time in five months in January. Last week, figures released by the Bank of England showed that mortgage approvals by six of the UK’s largest lenders underperformed over the same period, with the central bank saying firms polled for its survey cited “one-off factors” such as severe weather that kept prospective buyers from arranging loans as reasons for the slowdown.

Turning to risk trends, equity index futures are trading about 0.3 percent higher ahead of the opening bell in Europe, pointing to lackluster demand for the safety-linked US Dollar and Japanese Yen in the coming session.

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