EUR/USD Weakens as Weidemann Talks Negative Rates

Market Drivers for March 25 2014

GE IFO misses slightly, as Weidemann opens up to interest rates
UK CPI in line
Nikkei -.36% Europe -.84%
Oil $99/bbl
Gold $1314/oz.

Europe and Asia:
EUR IFO 110.7 vs. 110.9
GBP UK CPI 1.7% vs. 1.7%

North America:
USD Consumer Confidence 10:00 AM
USD New Home Sales 10:00 AM

Euro came under some mild pressure in morning European trade today after comments by ECB member Jens Weidemann suggested that the central bank may be open to the prospect of negative interest rates. The BUBA President was speaking hypothetically, but he did note that ECB was running out of tools to combat the appreciation of the euro and that negative interest policy may be an option for authorities to consider.

Mr. Weidemann is the most hawkish of ECB members and his evolving position on the issue indicates that German policymakers are becoming concerned with the rising EUR/USD exchange rate. Over the past several days the market has seen several pieces of data that suggest that high EUR/USD is beginning to take its toll on German economy.

Yesterday GE flash PMI readings both missed their mark falling to their lowest values of the year and today the German IFO report also came in worse than expected at 110.7 versus 110.9 forecast. Although all key economic readings in Germany remain near multi month highs, showing that the economy continues to expand, the latest batch of data is clearly signalling a slowdown that is starting to worry the authorities.

In addition to the high EUR/USD, the geopolitical tensions with Russia are also likely to weigh on German growth this quarter and the combination of these two factors could push the generally hawkish Mr. Weidemann to a more accommodative posture over the next several ECB meetings. Although its doubtful that the ECB will act at the meeting next week, if the EUR/USD rises above the psychologically key 1.4000 level the prospect for policy action will rise markedly as European officials try to contain the rise in the exchange rate.

Elsewhere UK CPI data printed in line at 1.7% as forecast indicating that price pressures are starting to ease just as the BoE predicted, leaving UK policymakers with more time to maintain their easy monetary stance. Cable saw little reaction to the news but did drift slightly lower on report that Mortgage Approvals have cooled to 47.5K from 49.3K the month prior.
With US calendar relatively light as the data docket contains only Consumer Confidence and New Home Sales, trading may remain rangebound for rest of the day. Yesterday’s midday squeeze in the EUR/USD was clearly algorithmically driven but the fact that the pair remains well bid despite challenging economic data and a more hawkish Fed suggests that any downside action in the unit may be limited and that ECB policymakers may be forced to act of they want to see a lower exchange rate as the year progresses.