German IFO Rose on Optimism about Spending Plans

eurusd was affected on Jan. 27 by the following factors:

- A better than expected reading of German IFO, thanks to optimism about the spending plans by the government to stimulate the Europe's largest economy.

- A comment from the ECB President Jean Claude Trichet, saying that the next important meeting will be in March, has a mixed reaction. First by raising speculations that the bank may not reduce its benchmark next week and second by making some investors worried about the negative effects of being reluctant to ease the policy and support the economy.

- Euro-zone current account deficit widened.

- German import prices fell

Dollar's Days!

Dollar continued to appreciate against all major currencies:

Euro-zone: Euro fell nearly 2 percent against dollar, touching 1.5005 and extending its weekly losses close to 4 percent, "the most one-day drop since September 2000". Selling euro accelerated after Trichet's comment on "materializing" risks to the growth, in addition to weak economic data from the euro-area.

UK: British pound followed the same scenario even after policymakers decided to keep the interest rate unchanged. Nationwide consumer confidence declined and HBOS home price index dropped when falling oil (and other commodities) prices strengthened this view that the MPC could finally get the flexibility to cut interest rate.

Oceania: Both Australian and New Zealand dollars extended their losses when having even more reasons. In addition to weak economic data and recent comments from officials on the possibility of interest rate cuts in the near future, these so-called commodity currencies had no choice but depreciation as a response to the sharp decline in oil, gold, copper, and other commodities prices.

Oil: Today's 116 $/b oil may looks relatively cheap and it might be the most important reason behind the dollar's strength and also the rally in stock markets. According to the Bloomberg's analyst, "the decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

However there are people who believe that such reaction is mostly technical than fundamental. For example, falling euro below its 200 day moving average (around 1.5227) could have triggered euro-selling orders and resulted in a faster depreciation.

As a summary I want to quote an analyst's view from the Bloomberg: "The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. "None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

Britain is certainly located in Europe!

Bank of England and European Central Bank both decided to leave interest rates unchanged today. Since there was no statement from BoE, it was just up to ECB's Trichet to shape markets' view on the prospect for the economy and monetary policy in Europe.

Deteriorated consumer confidence, decline in investment, rising unemployment, and the possibility of contraction in the GDP are not hidden to the market and recent depreciation of European currencies is certainly its reaction to the data. However, today's comments worked as a catalyst and triggered another round of selling Euro, Swiss Franc, and not surprisingly the British Pound. (see euro's reaction)

Reactions to ECB's Comments

European Central Bank's Trichet acknowledged weakness in the Euro-zone economic activity after deciding to keep the benchmark rate unchanged. As the chart shows, there was no sign of consolidation even at the daily support and the Euro extended its decline against dollar below that level.

It was when Pending Home Sales unexpectedly rose 5.3 percent in June which overshadowed a worse-than-expected rise in jobless claims.