The Euro is likely to overlook the German IFO survey of business confidence while the US Dollar may decline even if US CPI data tops economists’ forecasts.
Talking Points:
Euro Unlikely to Yield Follow-Through on German IFO Survey Outcome
US Dollar May Decline Even if US CPI Data Tops Economists’ Forecasts
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The German IFO survey of business confidence headlines the economic calendar in European trading hours. The forward-looking Expectations index is expected edge lower for a second consecutive month, hitting the weakest level since February. The outcome is unlikely to drive significant Euro volatility considering its limited implications for near-term monetary policy. Indeed, as we expected, minutes from April’s ECB meeting showed policymakers saw no need to consider changing their current stance (contrary to speculation following comments from Governing Council member Benoit Coeure earlier in the week).
Later in the day, the spotlight turns to April’s US CPI report. Expectations call for a downtick on the year-on-year core inflation rate (from 1.8 to 1.7 percent) after three consecutive months of improvement. Leading survey data hints an upside surprise may be in the cards however. The latest PMI report from Markit Economics reveals that output prices in the service sector – the largest part of the overall economy – rose at the fastest rate in seven months in April.
While this may foreshadow a firmer CPI result, it is unclear that such an outcome would necessarily drive the US Dollar higher. The benchmark currency’s tepid response to relatively hawkish overtones in minutes from last month’s FOMC meeting released earlier in the week suggest it may be pre-disposed to continue the downward correction launched mid-April. That means the CPI release may amount to little more than the passing of event risk uncertainty that – absent a truly remarkable deviation from forecasts – clears a path for the USD selling to resume. The same may prove to be the case for comments from Fed Chair Janet Yellen due later in the day.
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