Talking Points

* Japanese Yen: Tests 90.00
* Pound: U.K. CBI Trades Report Improves
* Euro: German Business Confidence Unexpectedly Rebounds
* US Dollar: Consumer Confidence and Home Prices On Tap

Euro Pares Gains Amid Rebound In German Business Sentiment

The euro surged to a high of 1.331 against the greenback following a rebound in the German IFO survey, but the intraday rally was short lived as the current account deficit widened to 16.0B from a revised reading of 6.0B in October. Fading demands from the global economy has certainly dragged on economic activity throughout the second half of 2008, and the outlook for growth remains bleak as the European Commission forecast the annual rate of growth to contract 1.9% this year.

The German IFO business confidence survey unexpectedly increased to 83.0 from a revised reading of 82.7 in December, while future expectations improved to 79.4 from 76.9 in the previous month as Chancellor Angela Merkel pledged nearly $105B in fiscal objectives to stimulate the economy over the next two years. Amid the minor improvement, the data suggest that the extraordinary efforts taken on by policy makers have certainly helped to boost sentiment throughout the region, but the growth outlook for the Euro-Zone remains bleak as the International Monetary Fund expects Europe's largest economy to contract 2.5% in 2009. Nevertheless, a separate report showed that import prices in Germany dropped another 4.0% in December after falling 3.4% in the previous month, which lowered the annual rate to -5.1% from -1.3%. Meanwhile, the current account deficit for the euro-region more than doubled in November as demands from abroad weakened further, and the disappointing trade figures continues to reflect a dour outlook for the Euro-Zone, which could lead the European Central Bank to continue its easing cycle over the coming months in order to avoid a deepening recession.

The British pound reached a high of 1.4242 as the U.S. dollar weakened across the board, and may continue to retrace the sell off from the previous week as investors increase their appetite for risk. Meanwhile, the U.K. CBI retail sales survey showed a minor improvement in demands as the index increased to -47 from -55 in December, Despite the improvement in sales, the outlook for spending in February hit a record low as the economy faces its worse recession in over a decade. As the U.K. economic calendar remains fairly light for the remainder of the week, risk sentiment is likely to dictate price action for the Sterling and its currency crosses.

The lack of tier-one data could leave the U.S. dollar at the mercy of risk trends however, a considerable improvement in consumer confidence could spur volatility for the greenback. Meanwhile, as market participants expect the Richmond Fed manufacturing index to increase to -49 from -55, a rise in production could help to brighten the outlook for the world's largest economy, but as the S&P/Case-Shiller home price index is expected to fall further, the dire state of the housing market could overshadow an improved outlook for production.