Contrast between economic data from the United States, the Eurozone and Germany may grease the wheels for the euro to reach the $1.60 figure as early as next week.
Unexpected weakness in U.S. durable goods is accelerating dollar losses across the board after Germany’s IFO business survey had surged to a seven-month high earlier today. Durable goods orders fell -1.7% last month, versus expectations of a 0.8% increase, with the broad weakness seen in the declines of 2.6% and 1.6% in both ex-transport and ex-defense orders.
It was a strong IFO business survey that pushed the euro above the $1.50 level a month ago for the first time and it is a seven-month high in the March IFO survey that’s giving the euro a 1.5¢ rebound following last week’s sharp losses in the currency. Germany’s main business sentiment survey surged to a six-month high at 104.8 in March from 104.1, defying expectations of a retreat towards 103.4. The IFO current assessment index rose to 111.5 from 110.3, exceeding forecasts of 109.8, while the business expectations index climbs to 98.4 from 98.2 against forecasts of a 97.8.
As we mentioned earlier this week, IFO survey has proven a key inflection point in the euro’s momentum shift during the 10-year life of the single currency. The chart below shows the strong positive correlation between the IFO’s climate index and European Central Bank (ECB) interest rates, suggesting that expectations of an ECB 2008 rate cut will diminish significantly. Continued U.S. data weakness, such as further sub-50 readings in the US ISM services and manufacturing surveys and a third consecutive monthly net loss in U.S. payrolls due next week, may push the single currency to as high as $1.60 in the second week of April. Such contrast in data strength presents a powerful rationale for the currency to gain further ground ahead.
At 10 a.m. EST U.S. new home sales are expected down 2.3% to 578,000 in February, with the annual decrease seen as much as 32%. The month’s supply shows how many months it takes for all new homes to be sold and will be scrutinized as it is expected to breach the 10-month figure.
Euro’s jumps on contrasting European/U.S. fundamentals
The contrast between yesterday’s release of U.S. consumer confidence and consumer expectations at five-year lows and 35-year lows against further multi-month highs in Germany’s business sentiment surveys should give another powerful boost to the euro, bringing it closer to the $1.60 level, especially that the currency has retreated for 5-consecutive days, a required element for further momentum accumulation. Next week’s ISM and non-farm payrolls reports from the U.S. may be instrumental in extending the euro towards the previous $1.59 high. Further euro strengthening will surely draw ECB policy makers into making further jawboning about the currency levels.
U.S. new home sales data will play a factor in determining whether we’ll see $1.5785 as early as today, but the possibility of $1.59 this week shall depend upon overall global market appetite as well as Friday’s U.S. consumer spending. Support climbs to 1.5550, backed by 1.550.
Yen still fired up
Yen strength picked up across the board in the Asian session after Asian/Pacific stock indices shrugged Tuesday’s gains in Wall Street, leading the retreat in risk appetite to further benefit the already strengthening yen. Price gains above the 100 yen level are proving increasingly fleeting as the pair drops tests the 99.00 figure. Support starts at 98.70, backed by the 98.40, which is the 50% retracement of the 95.73-101.02 rise. New home sales weakness will likely test the 98.40s, but support seen standing at 98.00.
Sterling remains dollar’s saving grace
Renewed declines in sterling in contrast to euro strength are giving the dollar a reprieve in a day when both the yen and single currency have dealt fresh damage to the greenback. The catalyst to the latest pond drop was remarks from Bank of England Governor Mervyn King, indicating the central bank was more predisposed to interest rate cuts. Even though King said UK interest rates were effectively in the same position as they were in the autumn, with the last two rate cuts aimed at addressing rising inter-bank rates. Despite five rate cuts over the last two-years, we expect the BoE to slash rates by 100 basis points this year to 4.25%, starting with next month.
Cable eyes initial target at $1.9920, followed by 1.9880. The pair may test the 1.9970s, but is seen remaining under the $2.0020 level.
EUR/GBP jumps by more than a full pence to 0.7890, nearing its 14-year high of 0.7910. We expect the pair to breach the high next week, eyeing 0.7930. Support stands at 0.7860.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
