Disappointing German IFO Survey Fails to Distract Euro Traders from Cyprus

By Benjamin Spier 22 March 2013 09:43 GMT THE TAKEAWAY: IFO business climate survey falls to 106.7 in March, following a 10-month high -> Bundesbank predicts economic growth in the current quarter -> Euro trading remains focused on Cyprus

The IFO German business climate survey declined for the first time in five months in March, after reaching a 10-month high in February. The business climate survey was reported at 106.7, disappointing expectations for 107.8 and down from 107.4 in the previous month. The IFO current assessment survey unexpectedly fell to 109.9 from 100.2 in February, and the IFO expectations survey fell to 103.6 from 104.6.

The results are based on IFO surveys of German firms, and the main business climate survey has not fallen below the neutral 100.0 point in three years.

The German economy is the Euro-zone’s biggest economy, and also one of the best performers through the Euro-zone debt crisis. The German GDP declined 0.6% in Q4, but the Bundesbank has predicted the country will see economic growth in the current quarter. Signs of further weakness in German economic growth are Euro negative.

That is why the Euro declined nearly twenty points and below 1.2900 against the US Dollar following the disappointing release. However, the Euro has recovered all those losses, as single currency traders remained focused on the Cyprus crisis. EUR/USD may now be seeing resistance at 1.2920, by a long term downward trend line from November 2011. A 200 day moving average may provide support around 1.2870.

EURUSD Daily: March 22, 2013

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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22 March 2013 09:43 GMT

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Chancellor Osborne Presents 2013 Budget; Sterling Rallies on BoE Remit

THE TAKEAWAY: GBP UK 2012 Budget Announcement by Chancellor of the Exchequer George Osborne > GBPUSD BULLISH

The second of two major events out of the United Kingdom today provided another modestly bullish catalyst for the world’s oldest currency, the British Pound. Earlier today, the Bank of England expressed some concern over the Sterling’s free fall, according to the March meeting Minutes, and provoked a rally in GBP-based pairs given the stance that a weaker Sterling could drive up inflation, which would hurt the economy. Seemingly, a higher rate of inflation would not be tolerated by BoE policymakers, even as improving growth prospects remains a priority.

Thus, while the British Pound is rallying after Chancellor Osborne’s budget announcement in parliament today, the focus is much less on the fiscal picture. The fiscal side of the equation remains muddled, with the government cutting the 2013 GDP forecast to +0.6% from +1.2%, and the 2014 GDP forecast to +1.8% from +2.0%.

Instead, the impetus for the Sterling’s rally was the slight alteration in the Bank of England’s remittance, which would allow for “forward guidance,” a policy that the Federal Reserve uses to communicate policy more effectively. Absent from the change in remit was a shift in the BoE’s inflation target, which remains +2.0% y/y.

There was chatter ahead of the budget release that a higher rate of inflation would be allowed to provide wriggle room for more QE; however, with the inflation rate still targeted at +2% y/y, it means that British consumers’ purchasing power will be sought to be preserved as much as possible. For now, this is viewed as marginally positive for the GBP, although the big picture remains: the British economy continues to struggle and is on the third leg of the recession.

GBPUSD 1-minute Chart: March 20, 2013

Charts Created using Marketscope – Prepared by Christopher Vecchio

The GBPUSD was quite volatile during the course of the budget presentation, falling immediately off the bat, from 1.5120, quickly back towards the lows at 1.5040. However, by the time Chancellor Osborne’s speech was finished, the GBPUSD had rallied sharply and recovered to as high as 1.5165. It should be worth noting that the GBPUSD only rallied after the monetary argument was set forth – the fiscal update provided little relief and prompted the sell-off back towards the daily lows.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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Pound Finds Modest Rally on Surprising Producer Prices

THE TAKEAWAY: UK inflation reaches a 9-month high, as expected -> Producer prices rise an unexpected 3.2% in February -> Pound rises on producer prices

UK annual inflation rose to a 9-month high in February and sent the Pound upwards in an otherwise steady moving European session. Consumer prices rose 2.8% from February 2012, meeting expectations and slightly higher than 2.7% inflation in January. The CPI was 0.7% over the month, according to the UK Office for National Statistics.

The surprise came from producers prices, which rose 3.2% over the month of February, beating expectations for a 1.5% rise and higher than the 1.3% rise in PPI over January. Retail prices rose 0.7% in February, slightly disappointing expectations for 0.8%.

The rising inflation may have been partially responsible for the Bank of England not increasing quantitative easing in March, as the inflation remains well above the central bank’s 2% inflation target. In February, BoE Governor King said that inflation must be looked at within the context of a struggling economy and trying to subdue inflation may hurt growth.

However, the higher annual inflation was as expected, which is why the Pound rise was attributed to producer prices and not the consumer prices. GBP/USD is currently trading close to 1.5120 in Forex markets, and resistance may be seen next at 1.5201, by the 23.6% Fibonacci retracement of the decline from January’s high to March’s low. Support may be provided by a 2.5 year low at 1.4831.

GBPUSD Daily: March 19, 2013

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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