German figures suggest it can avoid recession and lead the Eurozone back from the brink

Tom Tong24/Feb/2012Currency Updates

GBP

Sterling fell to a 10-week low against the Euro on Thursday as a stronger-than-forecast German Ifo survey and unexpectedly dovish Bank of England minutes weighed on the UK currency. The pound rose against the safe haven Dollar, however, as perceived riskier currencies rallied broadly following the German business sentiment survey that raised expectations the Euro zone’s largest economy could avoid a recession. The pound showed little reaction to a better-than-expected UK industrial trends survey from the Confederation of British Industry that showed factory orders hitting a six-month high in February.

BoE minutes on Wednesday showed two policymakers voted to pump an extra 75 billion pounds into the economy instead of 50 billion, raising the possibility the bank may opt for another round of asset purchasing. However, strategists said their reading of the minutes was less dovish than the market’s interpretation, and saw a risk of BoE policymakers concerned about inflation voting more hawkishly at future meetings.

Some analysts said Sterling’s fall against the Euro had gone too far and recommended buying it back at these levels. But with the price of crude oil in Euros hitting a record high on rising Iran tensions, other strategists said the single currency may be strengthened if the European Central Bank is also forced to adjust its inflation expectations higher.

EUR

The Euro managed an advance against all of its major counterparts following further positive news regarding Greece and the German business sentiment survey that raised expectations the Euro zone’s largest economy could avoid a recession. In turn, the Euro hit a two month high against the Dollar, Sterling and the Canadian Dollar. Yet, this strength seems increasingly suspect when measured against the trouble that the region faces. Fear surrounding ‘implementation risks’ for Greece’s second bailout program is headline material. Though the EU ministers agreed to the program in principle, there are many ways that the country could fail to secure the package – and even if they do, longer-term issues remain.

The price of crude oil surged to record highs in Euros and Sterling on Thursday, piling fresh pressure on the Eurozone’s troubled economy. The increases were driven by fluctuating exchange rates as well as escalating political tensions with oil-producing nations, in particular between Iran and the West over the former country’s nuclear programme.

USD

The safe haven greenback yesterday suffered slightly as risk sentiment returned with investors moving towards a riskier basket of currencies. The Euro led other risk assets higher after the German IFO survey of business sentiment rose to its strongest level in seven months. However, as risk trends continues to dictate price action across the financial market, the rise in market sentiment may keep the USD within a narrow range, and we may see the Dollar consolidate further before making a larger move to the upside.

As the more robust recovery in the world’s largest economy curbs speculation for another large-scale asset purchase program, the bullish sentiment underlining the USD should continue to gather pace over the near-term as Fed officials soften their dovish tone for monetary policy.

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Written by Tom Tong

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