FOREX: Euro May Rise as Higher German IFO Print Trims Rate Cut Bets

Talking Points

• Euro May Rise as German IFO Gauge Points to Firming Business Confidence
• US Dollar Sold on Profit-Taking in Asia After Rising to the Highest in a Month
• China Premier Wen May Set 2012 Economic Growth Target Below 8 Percent

The outlook for monetary policy is back in focus for the Euro in the aftermath of an agreement on the second Greek bailout package. Indeed, prices are showing an increasingly significantly correlation with the benchmark German 2-year bond yield. Today, this means the spotlight falls on the German IFO business confidence survey. Forecasts call for the Business Climate gauge – a composite of survey takers’ assessment of current conditions and future expectations – to hit a 7-month high in February.

The outcome may offer some near-term support for the single currency on expectations that cautiously improving economic metrics may ward off an ECB rate cut in the near term. Indeed, data compiled by Citigroup suggests Euro-area data releases have tended to surprise to the upside by increasing margins since mid-January. The markets now price in a 58 percent probability of a 25bps reduction in the benchmark lending rate at the next ECB policy meeting on March 8.

The US Dollar (ticker: USDollar) sold off against its top counterparts in overnight trade. The move appeared to have little basis in fundamental or risk-based trends, meaning it was likely driven by profit-takingafter the greenback soared to the highest in a month over the past two days. Indeed, stocks fell amid growth concerns in Asia, which would typically be expected to boost the safe-haven US currency. Rumors that Chinese Premier Wen Jiaobao will set a target of less than 8 percent for economic growth this year were reportedly behind pessimistic tone. A final announcement is due March 5.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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