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EUR/USD Finds Support from Most Unlikely Source

Boris Schlossberg

Horrid economic data and potential easing measures from the European Central Bank (ECB) weren’t even enough to sink the EUR/USD, which garnered support from the troubled Eurozone fixed-income markets.

The EURUSD tumbled in early-European trade today following weaker-than-expected German IFO readings, but the pair quickly recovered its footing and rose above the pre-news levels on bargain hunting and strong demand for euro crosses.

The EURUSD initially dipped to a low of 1.2953 after IFO missed its mark, printing at 104.4 versus 106.4 expected, while the forward expectations component declined to 107.2 versus 109.5 initially. This was the second consecutive month of declining business confidence, as slow demand and unseasonably cool weather both weighed on sentiment.

The IFO numbers clearly show that the manufacturing sector in Germany continues to struggle, and today’s data confirms the slowdown in activity evident in yesterday's weaker PMI data. There is now a very strong possibility that German GDP will contract in Q1, as the shocks from the periphery begin to spill over into the Eurozone’s largest economy.

Can Capital Flows Bail Out EUR/USD?

Ironically enough, the weak economic data has not yet had a negative impact on fixed-income markets, with Italian and Spanish debt performing especially well over the past several days. Much of the strength in the sovereign debt market is coming from speculation that Japanese and perhaps Chinese buyers will reallocate their portfolios in search of higher yield. This dynamic in capital flows has served to offset the dour Eurozone economic data and has provided some support for EURUSD.

Whether this support lasts, however, remains to be seen, and the market's focus will now shift to next week's European Central Bank (ECB) meeting. The consensus is now anticipating a rate cut as the central bank tries to stimulate demand in the region. However, many analysts feel that a mere rate cut will offer only limited impact, arguing instead that the ECB will need to become far more aggressive in its non-conventional measures if it is to jumpstart the moribund economy in the region.

USD/JPY Stalls Below 100…Again

Meanwhile, rebounds in EURUSD remain relatively anemic, and the pair could see further lows if the economic data does not improve soon.

In North America today, the economic calendar carries only durable goods data, with the market anticipating a rebound of 0.5% from last month's -0.7% decline.

Elsewhere, USDJPY has recovered from its vicious fall following yesterday's Twitter hack fiasco and is now back above the 99.50 level. However, the pair remains capped ahead of the 100.00 mark for yet another day. Still, the longer the pair remains above 99.50, the greater the prospects for a stop run through the century level as the longs will no doubt want to run the stops and option barriers still holding at that figure.

See also: USD/JPY: 3 Must-Have Catalysts for a Break of 100

By Boris Schlossberg of BK Asset Management

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