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

EURUSD A Day before the FOMC Meeting

The chart shows reactions from the eurusd on Jan 27.
- German import prices fell more than estimates
- IFO survey came better than expected, thank to the optimism about newly announced German spending plans.
- Euro-zone current account deficit widened in November.

FOMC will probably leave the target rate unchanged (zero to 0.25). But I think playing the FOMC rate decision is not an easy game; because:

- It is not a rate cut meeting
- Investors know the most probable message which the FOMC is likely to send (aggressive easing)
- German CPI figures will be released gradually before the meeting
- Obama's stimulus package would be discussed in the Congress as soon as tomorrow

For now, I think it may be better to wait for managing the U.S. GDP data on Friday.

Case Study: Reaction to UK Retail Sales

MPC's minutes on Wednesday helped sterling to appreciate against major currencies when it showed that there was a vote for an increase in interest rate. It also showed that they want to have more data before any decision on changing the rate and it was when Retail Sales and GDP were ahead.

Retail sales in UK dropped the most in decades, -3.9 percent, and sterling depreciate in response. But I think the opportunity was missed well before the data:

• The best time for selling pound might be probably at the midnight of Central Europe, when technical data were increasingly showing divergence (e.g. RSI divergence and MACD crossover in GBPJPY chart).


• And before the release, some weak economic reports from euro-zone such as German IFO and Euro PMI in addition to this fact that more concerning data are ahead from US housing markets were a trigger to the market to buy back the Yen as reducing carry trading.

Buying EURUSD; Starting to price FOMC Rate Decision

Upcoming data from US housing market, manufacturing, and consumer confidence are all expected to reinforce concerns and make it easier to expect the Fed to delay raising interest rate.
In about one hour to the market close, technical data suggest that the recent negative impact from German IFO on Euro has started to fade. So I decided to buy EURUSD at 1.5516, and I might increase the size if I find more supportive facts.