EURUSD Hits Fresh Lows As IFO Confirms ECB Rate Cut

Market Drivers May 23, 2014

Euro drift to 3625 on slightly weaker IFO
CIC Chairman - ECB position on easing is reasonable
Nikkei 0.87% Europe .01%
Oil $103/bbl
Gold $1294/oz.

Europe and Asia:
EUR GE GDP 0.8% vs. 0.8%
EUR IFO 110.4 vs. 111.0

North America:
CAD CPI 8:30
USD New Home Sales 10:00

The euro hit fresh two and half month lows in early European trade today after the IFO report missed its mark suggesting that the possibility of an ECB rate cut is almost inevitable. Europe's most important measure of business sentiment declined to 110.4 from 111.00 expected and 111.3 from the period prior.

All the readings in IFO were worse than forecast as current conditions declined to 114.8 from 115.5 expected and expectations ticked lower to 106.2 from 106.6 eyed. Overall the IFO remains at elevated levels suggesting that business confidence remains strong, but it has clearly been shaken by the recent events in Ukraine and the lackluster pace of recovery in EZ as a whole.

IFO's Klaus Wohlrabe generally cast a positive spin on the data noting that the institute continues to expect to see 0.3% Q2 GDP growth out of Germany as export demand remains surprisingly strong despite frictions with Russia. He noted that expectations in the auto industry have been especially robust.

Despite Mr. Wohlrabe's upbeat comments the market reacted negatively to the report as it provided further evidence that growth in EZ core is slowing and monetary stimulus from ECB will therefore be necessary. The key question now is just how aggressive will ECB be? Most of the market participants expect a rate cut both in refi and deposit rates - something that should spur even more spending from the penny pinching Germans as saving will become even less attractive. However, a rate cut by itself may not be enough and ECB may have to consider additional actions such QE against asset backed securities in order to make a meaningful impact on growth.

The markets are certainly becoming more convinced that ECB action is coming and after a few days of consolidation the euro has started to drift lower again as traders begin to price in the easing. Indeed the only reason that the euro has not fallen further is because the decline in US rates has cushioned its descent. However with US benchmark 10 year bonds appearing to have stabilized at the 2.50% level the downward path in the euro should resume. For now the pair remains perched on the 200 day moving average at 1,3617 as markets await the open of North American trade to see if US traders want to test stops at the 1.3600 level.