EUR/USD lower on weak German IFO

German IFO expectations declined to 106.4 from 108.3 in February (consensus 107.7, Danske 107.1) whereas the current assessment continued to increase to 115.2 from 114.4. This is the highest level since April 2012. The decline in the expectations component was broad based and it was the second decline in a row in the expectations component. Hence, although it still points to an acceleration in German GDP growth, it seems that the German business expectation indicators have peaked as also suggested by PMIs and ZEW expectations. The initial reaction to the disappointing IFO numbers is EUR/USD negative. However, note that EUR/USD outlook probably is skewed to the down side today anyway following last night’s significant spike of more that one big figure. Overall, euro-zone business survey data remain within the ECB’s comfort zone and minor deterioration in data is not expected to trigger any immediate ECB easing. US Markit PMI also disappointed yesterday and, EUR/USD still seems to be supported by relative performance in macro data between EU and US. Hence, despite the hawkish comments from the Fed last week we still expect EUR/USD to trend higher in the coming months and eventually to break above the 1.40 level.

Yesterday Russia was effectively kicked out of the G8 when the rest of the group – the G7 – issued a strongly worded statement denouncing Russia’s annexation of Crimea. The G7 said it would suspend participation in the planned G8 meeting in Sochi in Russia and threatened with more sanctions if Russia takes action to escalate geopolitical tensions further. While the G7 statement implies that the West definitely sees Crimea as ‘lost’, as the group of seven countries will only respond to further escalation of the crisis, the statement is likely to have a positive effect on market’s risk sentiment as it decreases the probability of further escalation of the crisis. Note in that respect that due to past week's flight to safe-havens speculative CHF positions, according to the IMM, now looks stretched long in a historic perspective. Hence, in the event of improved risk sentiment, we see potential for some CHF-weakening and we are currently long EUR/CHF via a short 3M in-the-money 1.21-1.24 put spread.