IFO Beats - Can Euro Recover?

Market Drivers October 25, 2016
IFO Beats forecasts
Volatility at lowest level of the year
Nikkei 0.76% Dax 0.50%
Oil $51/bbl
Gold $1270/oz.

Europe and Asia:
EUR IFO 110.5 vs. 109.5

North America
USD House Price Index 8:30

The euro found a mild bid in early European trade today when the IFO report printed better than forecast suggesting that German business sentiment remains robust as Q4 begins.

The IFO survey came in at 110.5 versus 109.5 with business expectations rising 106.1 versus 104.5 with the institute noting that the Brexit shock has now been fully digested by German industry and sentiment clearly rebounding from the summer time lows. IFO noted that German consumption remains strong and that exporters are seeing renewed demand from both US and China.

Ifo economist Klaus Wohlrabe noted that despite the stall in trade negotiations between Canada and the EU, business sentiment remained robust and that the economic momentum is expected to continue into the fourth quarter.

German GDP is expected to expand in 2016 at 1.8% - the fastest rate in five years - and given the upbeat data from yesterday's flash PMI and today's IFO that target may be exceeded. If growth does pick up it would greatly ease the pressure on ECB to loosen monetary policy further and could speed up the move back towards normalization.

Despite the upbeat econ numbers this week, the euro remains trapped below the 1.0900 figure. The pair tried to stage a half hearted rally in the wake of the release, but sellers quickly capped the rally. The pair has been selling off since last week's ECB presser having tripped key support at the 1.1100 level, but this week it has found support ahead of the 1.0850 area and longer it stays above that level the more likely it is to rebound - especially if US releases this week miss their mark and spur doubts about the planned Fed rate hike in December.

For now however the EUR/USD is likely to tread water along with the rest of the G-10 FX as currencies experience their lowest volatility this year with traders content to keep prices steady until fresh themes develop in the market.