Market Drivers for July 25 2014

IFO misses sharply EUR/USD drop below 1.3450

UK GDP in line

Nikkei 1.19% Europe -0.25%

Oil $102/bbl

Gold $1294/oz.

Europe and Asia:

NZD ANZ Business confidence 39.7 vs. 42.8

EZ GE IFO 108 vs. 109.6

GBP UK GDP 0.8% vs. 0.8%

North America:

USD Durable Goods 8:30

The euro took a hit today as the IFO report missed its mark by a wide margin indicating that business leaders are concerned about the escalating geopolitical tensions in the region. The IFO printed at 108.00 versus 109.6 eyed. Current conditions guage also fell to 112.9 vs. 114.5.

Commenting on the results Deputy Director of IFO Dr. Klaus Wohlrabe noted that the scale of the drop was surprising with export expectations at their lowest level of the year. Despite rise in activity in yesterday’s PMI data, German businesses are clearly becoming concerned about the impact of the conflict with Russia which could result in series on sanctions against EZ third largest trading partner.

If these political tensions translate into a chill on economic activity growth in Q3 could slow materially, although for now IFO continues to project that German GDP will rise at 2% in 2014. Still the currency markets are clearly concerned with EUR/USD trading heavy this week after breaking the key 1.3500 support level.

The euro dropped to session lows at 1.3440 in the wake of the release and has quietly consolidated its losses in morning European dealing. For now the pair has found support ahead of the 1.3400 level but investor sentiment remains highly negative it could probe that barrier later in the day when North American session opens for trade.

Meanwhile the first reading of UK GDP printed in line with expectations at 0.8% but this flash estimate is highly incomplete incorporating only about 44% of the economic activity. ONS made several assumptions on the rate of Industrial Production that may have to be adjusted later on. Furthermore the final revision of the GDP will only come in September and will be marred in comparison with prior readings because the ONS will try to measure “off the book” transactions in the UK economy which will raise the nominal GDP reading significantly.

Cable was unmoved by the data and remained near session lows in the aftermath of the release. The currency market is becoming more and more convinced that the BoE will not move on rates until next year and the GDP data offered no evidence to contradict that assumption. Therefore the pound remains under downside pressure as any prospects for a rate hike appear to be unlikely in the foreseeable future.

In North American trade the calendar carries Durable Goods data which is expected to rise modestly from the period prior. As US rates inch away from the week’s lows with benchmark 10 year finally clearing the 2.50% barrier, the dollar has benefited from the move with USD/JPY coming close to the 102.00 level in overnight trade. The pair looks ready to push through that barrier as the greenback continues to benefit from relative growth expectations and if US data proves supportive USD/JPY could retake the 102.00 handle as the day proceeds.

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