IFO Has Little Impact on Euro

The IFO survey satisfied neither bulls nor bears in early European trade today as the report printed below the consensus estimate of 106.0 but above the whisper number of 103 registering a reading of 105.6 The latest sentiment gauge of the German business community suggested that the Eurozone recovery continues to maintain pace, but the high cost of energy and the prospect of new value added taxes in the region's largest economy due to take effect next year are tempering enthusiasm about future growth.

After a sharp decline in last week's ZEW and a material correction yesterday in Belgium's business indicator which often acts as an accurate proxy for IFO, the market was primed for a downside surprise. Thus, overall the IFO results were relatively positive.

Nevertheless, the release provided markets with little sense of direction as it basically reaffirmed the consensus view that the ECB will hike rates only once in the month of August leaving the interest rate spread between the single currency and the greenback unchanged if as expected the Fed implements the same policy move at the next FOMC meeting.

Interest rates were also the subject of conversation in Asia trade where the yen firmed overnight breaking the 117.00 barrier. The Merchandise Trade Balance reported slightly below expectations as imports outstripped exports suggesting that Japanese consumer demand continues to strengthen.

BOJ member Miyako Suda, noted in a speech in Kobe that 'it is effective to adjust interest rates at a gradual pace" , but also stated that "we need to alter them at a pace that ensures they aren't behind the curve". Ms. Suda's nuanced comments indicated that the BOJ is well aware of the need to contain percolating price pressures in the Japanese system stemming from the escalating energy costs and continued pick up in economic demand and is consistent with our long term view that the central bank will implement additional rate hikes this year should price levels climb higher.

As such Thursday's Japanese CPI data should be critical to understanding BOJ's future policy moves.