Expectations over a near-term increase in interest rates are liable to decline further unless there is a surprisingly hawkish testimony from Fed Chairman Bernanke which looks unlikely. The US currency will, however, tend to gain defensive support from the deterioration in global risk appetite, especially if commodity prices fall. Overall confidence in the Euro-zone economy and Euro is also likely to remain very weak in the short term as Greek debt fears remain a key focus. The overall risks suggest that the EUR/USD will weaken to the 1.3450 region where at least near-term good support is realistic.
The Euro pushed higher as European markets opened on Tuesday and reached a high near 1.37 ahead of the German IFO release. The index of business confidence was weaker than expected with a decline to 95.2 for February from 95.8 the previous month and contrary to expectations of a slight increase. The data is likely to have been distorted by bad weather, but the deterioration reinforced a lack of confidence in the Euro-zone economy and pushed the Euro significantly weaker.
There were also continuing fears surrounding the Greek situation as credit ratings for the commercial banks were downgraded and underlying Euro sentiment remained negative as government-debt fears remained a key influence.
The US economic data was also weaker than expected with consumer confidence dipping sharply to 46 for February from a revised 56.5 the previous month and this was the lowest figure for 10 months as confidence in the labour market deteriorated. This can be a trend at this stage of an economic cycle, but there will be fears over underlying weaknesses.
Interest rate expectations will tend to be scaled back further, especially with Regional Fed President Bullard stating that policy may not be tightened during 2010. Markets will watch comments from Fed Chairman Bernanke very closely later on Wednesday, although he is unlikely to take a hawkish stance.
Risk appetite deteriorated sharply following the consumer confidence data and this helped support the dollar despite the weak data with the Euro testing support levels just below 1.35 before a limited recovery.