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Euro Holds Ground as IFO Nixes Rate Cut Speculation- Return of Risk?

Thursday, 24 January 2008 09:57:45 GMT  |  Boris Schlossberg, Senior Currency Strategist

The EURUSD rebounded above the 1.4600 figure in early European trade after better than expected IFO numbers boosted investor confidence and helped the DAX to gain more than 4% on the day.

Talking Points

•    Japanese Yen: Above 106, but off the highs as equity rallies discounted
•    Euro: Better than expected IFO puts rate cut talk to rest
•    British Pound: Recovers after early GBPJPY selling
•    US Dollar: Jobless claims, existing homes on tap

The EURUSD rebounded above the 1.4600 figure in early European trade after better than expected IFO numbers boosted investor confidence and helped the DAX to gain more than 4% on the day. In the wake of yesterday’s dramatic turnaround in the Dow which saw the US equity index recover more than 600 points from its low of the day, both Asian and European bourses were materially higher in overnight trade. But the positive price action in the equities has little follow through in the carry trades which saw most of the gains recorded during the close of the US session.

With the carry trade mainly discounted, the high yielders spent Asian and early European session quietly defending their gains from yesterday. The euro in particular was helped out by higher than forecast IFO numbers which printed at 103.4 versus 102.3 projected.  Recent economic data from the EZ has been remarkably resilient despite severe turbulence in global capital markets. At the start of this week rumors of a possible emergency ECB rate cut weighed on the unit.

However, tonight’s IFO results put an end to any notion of a near term rate cut from Mr. Trichet and company. For the time being the region’s economy continues to expand at a moderate pace allowing ECB authorities to maintain their hawkish posture.  If equity markets continue their recovery into the North American session, the combination of better risk environment and supportive fundamentals should favor further EURUSD gains.

In US session traders will keep their eyes peeled on the Existing Home sales which are once again expected to be soft dropping below the psychological 5M unit mark. However, the weekly jobless claims numbers may in fact be of more importance to the state of the US economy.  In our opinion labor markets are the dividing line between recession and a mere slowdown in economic activity. If unemployment begins to rise substantially it will be the death knell of US economic growth as consumer spending –already anemic – will contract even more. The key metric we’ll be watching is the 350K figure. Once claims rise above that level, the danger of tipping in to a recession rises markedly.
 
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: bschlossberg@fxcm.com

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