The euro firms towards the $1.4550s after receiving a reprieve from an unexpected improvement in Germany’s ZEW confidence survey. Another data-free day in the United States will divert the focus from currency-specific issues towards earnings releases as well as the Democratic primaries in Maryland, Virginia and Washington, DC, whose 168 delegates is the biggest since Super Tuesday and could give Barack Obama his first lead on the delegates count.
San Francisco Fed President Janet Yellen (FOMC non-voter) will speak on the economy at 11:05 am as she is expected to give her odds of recession and take on inflation. Last week Yellen said she was not confident that inflation could be avoided. Thursday’s Congressional testimony by Chairman Bernanke is widely expected to maintain the door open for further rate cuts, yet the deciding factor on market’s reaction will be any new warnings on inflation.
Euro receives ZEW reprieve for now
Euro stabilizes above $1.45, receiving a reprieve from an unexpected improvement in Germany’s ZEW confidence survey. The survey’s expectations index rose to -39.5 from a 15-year low of -41.6, versus forecasts of -45.0. The investor sentiment component, however, did fall to 33.7 from 56.6, its lowest level since September 2006. The European Commission’s 2008 gross domestic product (GDP) forecast for the Euro zone stands at 1.6%, compared to 1.8% by the ECB and the Bundesbank. Despite today’s ZEW report, downside risks remain for the single currency from an economic and risk appetite perspectives. Lingering rumors of a possible €6-8 billion write-down from German bank IKB continue to make the rounds but talk of a government bail out are offsetting these fears.
Any extended euro rebound shall remain capped at 1.4580, keeping the short term consolidation centered near the 1.45 figure, with support at 1.4480. Wednesday’s release of U.S. January retail sales will set the tone for the pair with forecasts of a deterioration in the headline rate from -0.4% to -1.0%. Interim support stands at 1.4460, backed by key foundation at 1.4430.
Yen capped at 107.70s, awaits U.S. retail sales
USD/JPY is expected to remain capped at 107.75-80 amid modest risk appetite trades. But emerging talk of a Japanese recession and speculation of a BoJ rate cut following the end of Governor Fukui’s term next month are fuelling negative current to the currency. 107.80 remains the line-in-the-sand resistance until Wednesday’s retail sales release from the United States, which could boost the currency versus the dollar, and rest of major currencies on risk appetite reduction in the event of renewed declines in the headline and core figures.
We expect brief run-up in the pair towards 107.50, followed by 107.85. We signaled last week that 107.80 acted as a key resistance seen for the past three weeks and was expected to do so as long as downside continues to act on U.S. equities and risk appetite. We stick with this call. A breach above it stands to face pressure at 108. Support holds at 107.00 and 106.60 for now.
Sterling eyes $1.9460 despite CPI rise, inflation report next
UK CPI rose to a seven-month high of 2.2% in the year ending in January from 2.1% but less than forecasts of 2.3%. But the core CPI slowed to 1.3% from 1.4%, its lowest since August 2006, undershooting expectations of 1.5%. Separately, the BRC total sales index rose 4.9% from 2.3%. After a brief run-up to $1.9550, cable drops back to 1.95 and is seen testing the 1.9460s.
Markets shift focus to tomorrow’s release of the Bank of England’s (BoE) quarterly inflation report due 5.30 am EST. Recall the release of the November report caused a sharp decline in sterling after basing its assessment on assumptions of a 25-bp rate cut in Q1. The BoE rate cut materialized in December. We expect tomorrow’s report to maintain that inflation would slip back towards its 2% target in 2009 after a temporary rise in 2008, which is likely to keep the currency under pressure.
Resistance remains capped at 1.9570. Support stands at 1.95, backed by 1.9460.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
