As Germany goes, so goes the EUR?

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As Germany goes, so goes the EUR? That looked like a possible scenario a little while ago after the release of the German IFO number gave a momentary boost to the single currency. But let’s not get ahead of ourselves. After a rather quiet, lackluster overnight trading session, the EUR jumped from the 1.3210 level to 1.3245 after the release of the IFO info.

German business confidence rose higher than expected to a 10 month high, showing that the largest economy in Europe is improving. The IFO institute in Munich said that its business climate index rose to 107.4 in February from 104.3 in January. This survey is based on the responses of 7,000 executives. The consensus number had been predicted as a gain of 104.9.

The German economy is expected to return to a growth pattern during the first quarter of 2013, after contracting 0.6% in the final quarter of last year. Economists predict that Germany will be one of the stronger economic countries in the Euro zone this year, but one wonders if it is strong enough to balance the recessions expected in Italy and Spain. According to the ECB, the Euro zone economy will contract 0.3% in 2013, while the Bundesbank expects growth of 0.4% in Germany. The Euro zone is still considered to be contracting.

The reaction in the EUR was swift, but it has not been able to sustain the move and is drifting back to pre announcement levels. Resistance for the EUR remains at 1.3250, then 1.3280. Long term support at 1.3170 has remained intact for the time being. A close above 1.3300 is needed to break the current downward trend. As I am writing this, some ECB members are commenting on the EUR, as both Coene and Hanssen have said the exchange rate is not “out of line” one way or another.

More euro: EUR/USD Head-and-Shoulders Pattern Breakdown

Traders are still focusing on the elections in Italy next week (Feb. 24-26) as well as FED Chairman Bernanke speaking next week and Non-Farm payroll release on Friday, March 1. The IFO data has not been able to counter the PMI data released yesterday and the overall mood in EUR is still a selling one. In Italy, former PM Berlusconi is closing the gap on Democratic Party candidate Bersani. While Bersani is still expected to win, there is a chance Berlusconi could return to power.

As the North American trading day begins, expect the EUR to remain within the overnight range. There are sellers above the 1.3240 level and reported buyers at 1.3180. I would be surprised to see the currency break the range today.

Have a good day and a good weekend.

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About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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