IFO Drops But Euro Pops

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Market Drivers August 25, 2016

IFO Drops Euro ignores
EUR/GBP bounces off 8500
Nikkei -.25% Dax -1.33%
Oil $47/bbl
Gold $1329/oz.

Europe and Asia:
EUR IFO 106.2 vs. 108.5

North America:
USD Weekly Jobless 08:30
USD Durable Goods 08:30
USD Flash Services PMI 09:45

The IFO survey of corporate sentiment saw a sharp drop in August in reaction to the Brexit vote but EUR/USD shrugged off the news and rose to fresh session highs boosted by short covering flows in EUR/GBP.

The IFO, which is the key business sentiment gauge in Europe showed a surprising decline dropping to 106.2 from 108.5 eyed. This was the biggest month over month decline in nearly 5 years with Current conditions falling to 112.8 vs 114.9 while expectations dropped 100.1 vs 102.5 forecast.

The irony of Brexit is that its single biggest impact may have been on German sentiment as highly export driven German businesses became clearly concerned about the prospect of UK leaving the EU. According to IFO, order intake from chemical and electrical sectors was subdued which may have weighed on sentiment as well.

Germany, as the export powerhouse of Europe has the most to lose from UK’s exit from EU, but the sharp fall in IFO reading may be more a result of fear rather than reality. So far neither the UK data nor the EZ Flash PMI data have shown any material deterioration of demand and the euro therefore shrugged off the worries and headed back towards the 1.1300 level as morning dealing progressed.

The overall FX market remains in a state of suspended animation as traders await the much anticipated speech by Fed Chair Janet Yellen as tomorrow’s Jackson Hole summit. The focus will not only be on whether Ms. Yellen provides a clear signal for the timing of tightening, but whether she will address the idea of neutral rate, which could indicate the pace of rate hikes once the Fed commits to the normalization policy path.

For now the recent ranges are likely to prevail as EUR/USD remains bound in the 1.1250 -1.1350 zone while USD/JPY continues to consolidate above the 100.00 level. However, if Ms. Yellen provides a clear signal in Friday’s speech, both pair could see a breakout before the week’s end.

Boris Schlossberg
Managing Director

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