fundamental alert

German IFO Expectations Drops as Financial Crisis Deepen, Euro-Dollar (EURUSD) Extends Losses

Monday, 27 October 2008 09:16:39 GMT  |  DailyFX Research

German October IFO dropped to 90.2, from 92.9 in September. That was even lower than our quite pessimistic median of 90.5 and suggests that the German economy continued to contract at the start of the fourth quarter. The breakdown showed the reading for the current business climate slightly higher at 99.9, up from 99.8 in September. The more forward looking future expectations index, however, slumped to just 81.4 from 86.5 in the previous month. The sector breakdown showed the deterioration in sentiment in all sectors with the diffusion indices firmly below 0, thus indicating that pessimists outnumber optimists. The weak data suggests that the ECB's initial hope that the economy will start to stabilize and recover in Q4 is likely to be too optimistic and will add to arguments for another rate cut from the ECB already at the November meeting.

Meanwhile, Euro-Dollar (EURUSD) extended losses after the German IFO, which saw the pair hit 1.2335 lows before buyers came back in. The pair already experienced heavy selling pressure, with EUR-JPY and EUR-CHF both seeing good flows on the way down to respective lows of 113.64 and 1.4301. The appetite to deleverage remained heavy from the European open and was the driving force behind today's pressure on the euro. The German IFO fell to 90.5, which was lower than expected and suggested continued contraction in the German economy. Weak economic sentiment in the Euro-Zone and ongoing fears over European bank exposure is expected to draw in more sellers on strength. EUR-USD shorts favor a near-term move on 1.2000, while longer term accounts are even beginning to price in the risk of a run on parity amid the markets tendency to overshoot on a trend. Near-term risk is 1.2300 option barriers, while sellers are tipped from 1.2400 and in to 1.2430-50.

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