Tuesday, August 26, 2008

Euro Breaks 1.4600 After German IFO Disappointment, Will U.S. Data Keep Dollar Rally Going?

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Written by John Rivera, Currency Analyst

The Euro broke below 1.4600 after the German IFO Survey fell to a three year low. German business confidence fell to 94.8 from 97.5 in July and far below the expected 97.2. The EURUSD was already trading heavy having fallen over 100 points in Asian trading ahead of the German GDP report which showed the country's economy contracted 0.5% in the second quarter.

Talking Points   
•    Japanese Yen: Back Above 109.80
•    Swiss Franc: Consumption Lowest In  Almost A Year
•    Euro:  German Growth Contracts As Business Confidence Falls To 3 Year Low
•    British Pound: Falls On Declining European Outlook
•    US Dollar: Housing Data and U.S. Consumer Confidence On Tap

Euro Breaks 1.4600 After German IFO Disappointment, Will U.S. Data Keep Dollar Rally Going? .

The Euro broke below 1.4600 after the German IFO Survey fell to a three year low. German business confidence fell to 94.8 from 97.5 in July and far below the expected 97.2. The EURUSD was already trading heavy have fallen over 100 points in Asian trading ahead of the German GDP report which showed the country's economy contracted 0.5% in the second quarter. The outlook for Europe's largest economy is now expected to continue to decline in 3Q, which was evident by the fall in the expectations component of the IFO indicator to 87.0 from 90.0, which was the lowest since February, 1993. Additionally, consumer confidence in the country fell to 1.5, the lowest in five years, declining the prospects of domestic growth.

The German economy shrinking for the first time in four years may be a clear sign for the ECB, that a more accommodative monetary policy is needed to prevent the region from falling into a recession. German efficiency and emerging market demand helped it withstand the head winds from the U.S. longer than expected, but the subprime crisis's impact on global growth has finally taken its toll. The central bank's decision to raise credit costs in July has only accelerated the decline and may have brought the region to the brink of a recession, as German growth has masked weakness in other European leaders like Spain and Italy.

The Pound fell to a 25 month low of 1.8368 on the German news, as its prospects for growth declined with its major trading partner's economy heading for a recession. The outlook for the U.K. economy has become bleaker as it is contending with a housing slump in addition to slowing global growth. Although the BBA report showed home loans increasing to 22,448, it was a minor improvement from the lowest on record reading of 22,369 in July. Despite inflation well above their 3% threshold at 4.4%, the BoE may be forced to consider a rate reduction by year's end as export demand and domestic growth continue to slow. 
 
The U.S. calendar is full of releases today with housing, manufacturing and sentiment data on tap. The S&P Case/Schiller housing report is expected to show that home prices fell another 16.2% in June, which is expected to cause new home sales to decline another 0.9%. Although yesterday's existing home sales report showed a rebound, the gain was mainly due to foreclosure, short sales and price reductions, signaling the housing woes are far from over. Nevertheless, as the European and Asian economies continue to slow, the U.S. economy has become increasingly more attractive for investors which should continue to contribute to the dollar's recent strength. An expected improvement in the U.S. consumer confidence report and the Richmond Fed Manufacturing Index will also add bullish sentiment.

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