The EUR/USD regained the 1.3500 level in early European trade after the IFO survey of business sentiment posted its best reading in more than a year indicating that business activity in Eurozone’s largest economy remains robust. The IFO printed at 109.3 – much better than the 107.7 eyed with current conditions rising to 112.2 vs. 116 forecast while expectations increased to 106.3 versus 104 projected.
IFO economist Klaus Wohlrabe noted that easy monetary policy across the G-4 universe is helping exporter sentiment while domestic demand for capital goods remains stable. Germany continues to diverge from the rest of Europe as its economy is vastly outperforming the other member nations especially France which is teetering on the edge of recession.
This contrast in growth is sure to create conflict in the union as periphery nations will no doubt press for more monetary easing in order to stimulate growth. However, for now Germany continues to hold the line on any further policy with Mr. Draghi dismissing any talk of negative interest rates.
Such hawkishness, along with continued positive surprises out of Germany have helped to maintain a floor underneath the EUR/USD and today’s pop above the 1.3500 level indicates that currency continue to find the unit attractive. However, unless the periphery begins to see a pick up in demand the disparity between German growth and the rest of the EZ sluggishness could create major tension in the region and put a cap on the current rally.
Ultimately the clear difference in intent between the hawkish leaning Fed and the still very dovish ECB is likely to tilt the balance of buying in favor of the dollar, assuming US growth remains in track and the political warfare in Washington is kept to a minimum.
Elsewhere, USD/JPY paused to correct some of yesterday gains dropping below the 101.00 level, but found buyers underneath that figure and was trading at 101.25 by mid morning London dealing. The North American calendar is barren today, so currency traders may be looking at equity and bond markets for clues. If long term yields continue to rise USD/JPY could make a run at the key 101.50 resistance level as the day proceeds
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