Euro to Look Past German IFO as Markets Stay Focused on Earnings

Talking Points

• German IFO Unlikely to Yield Strong Response, Earnings News in Focus
• S&P 500 Stock Index Futures Point to Cautiously Risk-On Environment
• US Dollar Consolidates vs. Major Currencies in Quiet Overnight Trade

Major currencies consolidated against the US Dollar (ticker: USDollar) in quiet overnight trade. In European hours, the German IFO business confidence survey headlines the economic calendar, with median forecasts calling for a modest pullback in the headline Business Climate index. A print in line with expectations (109.5) would snap a streak of five consecutive increases but the rising trend playing out since late last year would be left firmly intact, both on a month-to-month and 3-month average basis. On balance, this seems to offer little that has not been priced in already, amounting to modest market-moving potential for the Euro.

Looking ahead, the corporate earnings docket enters the spotlight once again. The central uncertainty driving financial markets remains the degree to which an accelerating recovery in the US can offset a recession in the Eurozone and a slowdown in China. This means traders will be focused on guidance from cycle-sensitive companies to establish near-term direction for risk appetite trends. This time around, first-quarter reports from McDonald’s and Kimberly-Clark will be sought for a gauge of consumer sentiment while those from Honeywell, General Electric and Schlumberger will serve as a proxy for broad-based global growth trends. Sideline comments from the G-20 Finance Ministers’ meeting as well as the ongoing IMF and World Bank summit may also factor into the equation.

S&P 500 stock index futures are pointing higher in late Asian trade, arguing for a broadly risk-supportive environment (at least for the time being). This generally bodes well for stocks-linked currencies, particularly the Australian, Canadian and New Zealand Dollars. To some extent, the same can be said of the Euro, while the British Pound appears focused on BOE policy rather than risk appetite. The still-formidable correlation between benchmark 10-year US Treasury yields and USDJPY suggests sentiment-based moves will be indirectly transmitted into Yen price action as well, with the Japanese currency finding itself on the defensive in the event that an upbeat session sends shares higher and weighs on bond prices. Needless to say, the return of risk aversion would produce polar-opposite results.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

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

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