Euro rises on German Ifo, gains seen fragile

The euro rose on Friday after a better-than-expected a German business sentiment survey, but gains looked set to be capped by concerns over Spain’s finances and uncertainty ahead of the first round of French presidential elections on Sunday.

By (Reuters)

Published: Fri 20 Apr 2012, 3:53 PM

Last updated: Tue 7 Apr 2015, 11:24 AM

Germany’s Ifo business climate index rose to 109.9 in April versus a forecast of 109.5, in a sign the euro zone’s largest economy continued to outpace the bloc’s debt-ravaged southern states.

The euro rose 0.3 percent to a session high of $1.3180, but stayed in a range roughly between $1.30 to $1.32 that it has traded in since early April. Traders cited sizeable options expiries around $1.32 that were likely to check gains.

Despite signs German economic growth was still robust, the outlook for the euro zone and the common currency remained cloudy given Spanish bond yields were trading above 6 percent, within range of a 7-percent level that is seen as unsustainable.

Further pressure on Spanish and Italian yields could see the euro move towards the lower end of its recent range. Analysts said a break of strong resistance around $1.30 could open up the door to a test of the 2012 low of $1.2624, but most expected the euro to stay rangebound ahead of the French vote.

“The reaction for the euro is more likely to come after Sunday when we begin to hear what the market will view as credible policies should the candidates get elected,” said Daragh Maher, currency strategist at HSBC.

Financial markets are growing nervous that the expected overall winner, Socialist Francois Hollande, may have a looser grip on government finances than current President Nicolas Sarkozy.

Market rumours - later denied - of a French credit downgrade weighed on the common currency in the previous session.

Concerns about Spain’s ability to get a grip on its deficit, debt and banks given a grim outlook for growth have weighed on investors’ minds for days. Greek banks are also expected to post deep losses for 2011 when they report later in the session.

Still, weaker-than-expected U.S. data on Thursday and expectations of further monetary easing from the Bank of Japan next week meant many investors were reluctant to sell the euro aggressively against the dollar or yen.

Some strategists said that, with the market holding hefty short euro positions, the common currency could break out of the top of its range if its so far brief recovery went far enough to force those bearish investors to back off.

The International Monetary Fund is expected to announce over the weekend the amount of extra funds raised to bolster the euro zone financial firewall. IMF managing director Christine Lagarde wants at least $400 billion in extra funds and so far $320 billion has been pledged up Europe and Japan.

“If it were to go beyond the $400bn soft target and approach the original $500bn target, then the euro could gap higher on the Sunday open,” Citibank analyst Greg Anderson said in a note.

“On the other hand, if total fundraising fails to go beyond the $320bn announced thus far, then we would expect a larger reaction, with euro gapping lower,” he said.

BOJ EASING SPECULATION

The yen hovered close to its lowest levels in ten days against the dollar after Governor Masaaki Shirakawa said the BoJ would continue powerful monetary easing until a 1 percent inflation target is in sight.

His words reinforced expectations the BoJ will ease policy further at its April 27 meeting.

The dollar stood at 81.60 yen, having hit a 1-1/2 week high of 81.74 the previous day before and bringing its April 10 peak of 81.87 yen into focus.

The euro hit a two-week high of 107.57 yen, up 0.4 percent on the day and staging a strong comeback from Monday’s trough of 104.63 yen.

But some traders said the market has already priced in a policy loosening and more than 5 trillion yen of fresh asset purchases would need to be announced to weaken the yen much further.

Commodity currencies were also broadly steady against the U.S. dollar, with the Aussie trading at US$1.0339 and the New Zealand dollar edging down 0.1 percent to US$0.8130.