Euro Flounders Yen Strengthens

The EUR/USD continued to consolidate losses near the 1.2800 figure in quiet Asian and early European trading as the EZ economic calendar was completely empty tonight. The focus of most European traders today will be on the little known Belgium Business Confidence survey due out at 13:00 GMT. Belgium, though a very small country in the Euro-zone, conducts more than 90% of its economic activity within the region and therefore serves as an excellent proxy for overall European business demand. The BBC survey has be been a good precursor to the much larger and more important IFO survey due out on Thursday. Therefore, traders will be watching the BBC readings for any clues to the IFO results. As we noted yesterday, if IFO confirms the downward turn signaled yesterday by the ZEW, hawkish rhetoric from certain ECB members notwithstanding, the European central bank will have to revaluate the pace and magnitude of any additional rate hikes this year.

Meanwhile the yen fared better in overnight trading with USD/JPY changing hands at 116.20 down from yesterday's New York high of 116.85. Japanese Adjusted Merchandise Trade Balance printed better than consensus coming in at 799.9B yen versus 750.0B yen projected. Although imports rose a stunning 16.8% on the back of higher energy prices, exports also registered a double digit gain rising 14.2%. The trade surplus widened for the first time in 17 months suggesting that Japanese economy may perform far better than the market expects in the second half of the year if oil prices recede below $70/bbl as they are now the primary drag on Japanese growth.

In US traders will keep a keen eye on the Existing Home sales report due out at 14:00 GMT today. Expectations are for a decline to 6.55M from 6.62M units the month prior. If proven true this would be the fourth consecutive decline in housing sales and would indicate that the sector is in the midst of a major correction. However, with market sentiment already skewed to the downside after very low readings from the housing builders and U of M consumer confidence surveys last week, any upside surprise could provide further strength to the dollar and push EUR/USD to test the 1.2750 level. If housing demand proves more resilient than the estimates from the current chorus of dollar bears, it may ease some of the worries in the FX market over the structural cracks in the US economy. On the other hand if housing demand continues to contract dollar longs will have little support for their position as the market will begin to price in the possibility of an upcoming recession.