Euro Corrective Weakness: Already Behind Us?

A stronger-than-expected German IFO business climate index lifted Euro to a three-week high against the US dollar Wednesday. The headline index came in at 103.5 in May from 102.4 in April, versus a 102 forecast. An indicator measuring expectations for future business rose to 97.3 from 96.7. IFO said today that “the downturn in the German economy will be rather moderate” and “we will see at least 2% growth this year."

German Economic minister Glos said today that the recent surge in German IFO business sentiment shows that growth risks have not increased despite the effects of a stronger Euro, higher oil prices and financial market instability. Indeed, Germany is faring far better than other European countries like Spain and Italy, and definitely much much better than the US. Volkswagen (VLKAY.PK), Europe’s largest car manufacturer, said it boosted auto sales in China by 28% in the first four months of the year.

We are certain that the European Central Bank won’t be thinking of cutting interest rates, given the high consumer prices in the Eurozone and surprisingly decent economic data and sentiment. In any case, the ECB may even consider raising interest rates later this year if growth risks subside. On the other hand, there is still a small chance of the Fed cutting interest rates on June 25, although there is 88% odds that the Fed will keep its target rate for overnight lending between banks at 2% according to the Fed fund futures.

Forex Trading

EUR/USD broke above ceiling of 1.5700 and rallied more than 70 pips to an intraday high around 1.5775. The fact that EUR/USD has broken past several important technical levels suggests that Euro weakness could be over, so dip buying could be the best action to take. Short-term bull targets are possibly around 1.5800, 1.5830, 1.5860.

The US dollar also weakened against the Swiss franc, with USD/CHF falling to a low around 1.0275 and is hovering around 1.0300 currently. 1.0220-40 could be next bear target.

Meanwhile, the Australian dollar continues to make a new multi-year high against the US dollar, with AUD/USD rising to a high around 0.9655.

GBP/USD didn’t get enough bullish push to go above 1.9700 after minutes of the BOE’s May meeting revealed the MPC voted 8-1 in favor of leaving interest rates at 5%.

Wednesday:

US FOMC minutes 1800 GMT

Japan merchandise trade balance 2350 GMT

Thursday:

UK retail sales 0830 GMT

US house price index 1400 GMT

Bank of Japan minutes for Apr 8/9 meeting 2350 GMT