Euro Makes A Slow Turn As IFO at 14 year Highs

Receding oil prices and an exchange rate that has stayed below the 1.2000 figure for most of the month has buoyed business confidence in the region and bodes well for future prospects of growth in Q1.

The news also helps to buttress the expected ECB decision to raise rates to 2.5% at the upcoming March 8th meeting. Indeed IFO head economist Dr Gernot Nerb, noted that the upcoming ECB rate hike would not stifle growth in Germany as the recovery appears to be broadening and strengthening.

As a result of this news the market bid up the pair which has been basing in the 1.1850-1.1900 zone for several weeks. Whether this is a true turn in the euro or just another fakeout-breakout will only be evident in the near future, but latest price action does indicate that the market may be warming up to the single currency.

Last week's relatively bullish testimony from Fed Chairman Bernake failed to budge the greenback as consensus is forming around the idea that 5% will cap the Fed tightening cycle.

Meanwhile, December's sharply lower TICS data continues to hang over dollar bulls like an ever darkening cloud as it brings back all of the concerns about US Balance Sheet position that have been ignored by most players for more than a year.

USD/JPY also enjoyed a rally as the pair traded from 118.50 to below the 117.00 level on comments from Japanese Ministry of Finance that there should no correlation between yuan and JPY moves. Traders immediately seized on the suspicious comments as an indication that the Chinese may be on the verge of announcing another revaluation and sold the pair very aggressively throughout the Asia and European sessions.

Over the past few weeks several analysts have made the point that the USD/JPY carry trade has become too crowded, essentially turning into a one way bet and it is therefore no surprise that the pair is now vulnerable to quick and vicious sell offs.