daily brief

Euro Trades Choppy As Risk Appetite and A 16 year low German IFO Dictate Flows

Monday, 24 November 2008 09:49:42 GMT  |  John Rivera, Currency Analyst

The Euro reached as high as 1.2677 on risk appetite flows on the back on the news that the U.S. government would provide aide to beleaguered bank Citigroup. However, forex traders would sell the single currency ahead of an expected weak German IFO report.

Talking Points
• Japanese Yen: Finds Support at 95.00
• Pound: Fins Support On Risk Appetite
• Euro: German IFO Falls To 16 Year Low
• US Dollar: Existing Home Sales On Tap

Euro Trades Choppy As Risk Appetite and A 16 year low German IFO Dictate Flows

The Euro reached as high as 1.2677 on risk appetite flows on the back on the news that the U.S. government would provide aide to beleaguered bank Citigroup. However, forex traders would sell the single currency ahead of an expected weak German IFO report. Indeed, German investor confidence would fall to 85.8 from 90.2 as the country finds itself in a recession. The outlook for the German economy has become bleak as the expectations component fell to 77.6 from 81.4. The news would send the Euro down to 1.2562 before it found support.

As the outlook for Europe’s largest economy dims there may be more calls for more aggressive actions from the ECB in easing interest rates. Expectations are that the central bank will cut rates by 50 bps at their December policy meeting and the recent rhetoric from committee members has confirmed their intentions of taking a measured approach as they adhere to their price stability mandate. We may see price today and throughout the week dictated by risk winds as markets try to determine if the worst of the banking crisis is over. Risk appetite has started to lend Euro support which may continue throughout the U.S. trading session.

The Pound has also started to find support on the back of increased optimism by traders pushing the Sterling to 1.4990 before finding resistance. Cable bulls have driven the currency higher after it bounced from support at 1.4700 following Friday’s sharp decline. The BoE is expected to continue cutting rates aggressively and follow the Fed and SNB by taking its benchmark rate to as low as %1.0. The declining interest rate expectation will remain a weighing factor for the Pound and should limit its upside potential.

Despite the expected confidence that the headlines from the U.S. are expected to provide, the dollar has failed to gain any traction against the Yen in overnight trading after an initial bullish move. The pair failed to break below the 95.00 price level which may signal that investors are remaining cautious as the credit crisis continues to impact banks, evidenced by Citigroup’s troubles.

The $20 billion of direct investment by the U.S. government into Citigroup could generate investor confidence and see the dollar weaken on risk appetite. The beleaguered bank will also receive $306 billion in government guarantees for troubled assets on its balance sheet. Additionally, the democrats have outlined a plan of action that will generate a fiscal stimulus plan on the $500-700 billion range that will be ready to be sign be New President Barack Obama once he is inaugurated. The plan will include generating new jobs to rebuild infrastructure and tax relief for the middle class. However, the fact that these measures will not be in place until the new administration takes control, traders may view that as too little too late and continue to seek the safety of U.S. treasuries leading to dollar strength. U.S. Existing home sales are due to cross the wires and the 3.5% decline that is expected will temper traders enthusiasm. Ultimately, until the housing market bottoms, risks remain that more banking troubles can emerge as mortgagee back securities continue to see their value diminish weighing on lender’s balance sheets. This could lead to the reemergence of risk aversion and see safe haven flows lead to dollar support on the day.

Will The EUR/USD Fall to 1.2000? Join us in EURUSD Forum

Related Articles:

Forex Trading Weekly Forecast 11.24.08
Euro-Zone Current Account Deficit Widens to 10.6B as Capital Outflows Surge Higher

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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