Forex Trading

The Euro may see near-term gains in European hours as Germany’s IFO indicator of business confidence shows that companies’ 6-month economic outlook improved for the eighth consecutive month in August, but the likely path of interest rates favors the downside in the long-term outlook.

Key Overnight Developments

• Japan's Trade Surplus Shrinks in July, Further Losses Likely
• Euro Flat, British Pound Lower Against USD in Overnight Trading

Critical Levels



The Euro tried lower but rebounded late into the session to yield a flat result in Asian trading. The British Pound declined, testing as low as 1.6306. Technical positioning suggests the US Dollar is carving out a bottom against most major currencies.

Asia Session Highlights



Japan’s Merchandise Trade Balance surplus shrank to 380.2 billion yen in July, down from a revised 507.5 billion in June as imports grew 3% while exports shrank -1.3% from the previous month. The metric hit a record low in January 2009 and has since corrected higher, coinciding with acceleration in the growth of unemployment that has weighed on consumer spending, including that of foreign-made products. Indeed, in annual terms, the rate of contraction in inbound shipments (-40.8%) continues to outpace the drop in overseas sales (-36.5%). Still, the trade balance has been trending firmly lower since the surplus peaked in September 2007, the same month that US personal consumption of durable goods topped out and began to trend sharply lower. Although current economic growth forecasts suggest the US will outpace most industrial countries as the global recovery gains traction, chances are it will be some time before the American consumer is ready to meaningfully commit to big-ticket purchases such as Japanese cars and electronics. Indeed, a survey of economists conducted by Bloomberg calls for the external sector to add just 2.3% to overall growth on average this year and in 2010, the least in 9 years.

Euro Session: What to Expect



Germany’s IFO Survey of business confidence is expected to show that firms’ 6-month economic outlook improved for the eighth consecutive month in August. Still, the reading is expected at 92.0, a print below the 100 “boom-bust” threshold, suggesting conditions are still deteriorating but at a perpetually slower pace. Some recovery is to be expected as an array of fiscal stimulus both in Germany and abroad boost domestic demand and exports, but the big question in the Euro Zone’s top economy as well as most anywhere at this stage is whether growth is sustainable after the flow of government cash dries up. As it stands, a survey of economists conducted by Bloomberg suggests that Germany, and by extension the Euro region as a whole, will underperform most industrialized countries at least through the end of next year. The most pronounced differentials are seen against commodity-linked counties (Canada, Australia, and New Zealand) as well as the United States. A comparatively slower pace of economic growth will mean that Europe lags behind the curve as central banks begin to return to higher interest rates, a prospect that surely bodes ill for the single currency.

Written by Ilya Spivak, Currency Analyst
Article Source - Euro May Gain as German IFO Rises But Long-Term Outlook Favors Downside (Euro Open)