Euro to Look Past ZEW Data, US Dollar Eyes World Economic Forum

Talking Points:

• Euro likely to look past ZEW survey as ECB rate decision looms
• US Dollar may fall as Davos headlines inspire “reach for yield”
• Aussie Dollar sinks as iron ore drop echoes in RBA policy bets

The January edition of Germany’s ZEW survey of investor confidence headlines an otherwise tame data docket in European hours. Sentiment is expected to improve a bit but the outcome seems unlikely to generate much a response from the Euro as traders await Thursday’s ECB monetary policy announcement before committing to a firm directional bias.

The annual World Economic Forum is also slated to begin in Davos, Switzerland. The gathering of global leaders in economics, politics, finance and business will almost certainly produce ample eye-catching headlines. A sense of confidence in near-term global growth dynamics may encourage “reach for yield” behavior from investors, which has recently translated into broad US Dollar weakness.

Representatives from the US, Canada and Mexico will also launch the sixth round of talks in an effort to renegotiate the NAFTA free trade agreement. The Canadian Dollar took a hit last week after US officials expressed frustration with a lack of progress thus far. That may see markets responsive to soundbites coming from the sidelines of the gathering.

The Japanese Yen edged higher following the BOJ monetary policy announcement. Governor Haruhiko Kuroda and company left the policy unchanged – pouring cold water on hopes for imminent stimulus reduction – but markets seemed to latch on to policymakers’ description of inflation expectations as “more or less unchanged” rather than “weakening” in the prior assessment.

The Australian Dollar fell alongside local bond yields, hinting a dovish shift in RBA monetary policy expectations as the catalyst driving the selloff. The move also coincided with a steep drop in prices for iron ore, one of Australia’s top export commodities. Traders might have reckoned that this may foreshadow headwinds for overall economic growth, reducing scope for interest rate hikes.

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** All times listed in GMT. See the full DailyFX economic calendar here.

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

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