The IFO data will help underpin near-term Euro confidence, although it will be difficult to extend gains from current levels.
The dollar consolidated on Monday and settled close to 1.4825 after failing to make a serious challenge on key technical levels. The US currency strengthened in early Europe on Tuesday with highs around 1.4780
The German IFO report was stronger than expected with an increase to 104.1 for February compared with 103.4 the previous month. The improvement in confidence will ease immediate fears over the Euro-zone economy, although there will be some concerns over a further deterioration in the expectations component.
Confidence will still be fragile with reports that the ECB was set to downgrade its GDP forecasts and the Euro-zone will find it very difficult to de-couple from US weakness. Nevertheless, the firm headline IFO data will make it easier for the ECB to resist any short-term pressure for lower interest rates which will provide near-term Euro support.
In response to the data, the Euro strengthened strongly to 1.4670 and the strength of the response illustrates that overall dollar sentiment is still depressed.