XM Research Desk: Risk appetite increased further in Tuesday’s European session as better-than-expected survey data out of Germany underlined the improving economic outlook for the Eurozone as well as for the global economy.
Germany’s Ifo business climate index rose to a 2½-year high of 110.5 in October, beating forecasts that it would stay unchanged at 109.5. The Ifo current conditions and expectations indices also increased to 2½-year highs and were significantly above consensus estimates. German and Eurozone business sentiment had taken a hit in the immediate aftermath of the Brexit vote, raising concerns of a renewed slowdown. However, Brexit fears appear to be subsiding and the Eurozone economy looks to be regaining momentum.
The data follows yesterday’s flash manufacturing and services PMIs for the Eurozone and the flash manufacturing PMI for the United States, which also pointed to a strong upturn in business confidence and activity in October.
The euro firmed slightly after the data, rising to 1.0893 dollars, but later fell back as it was unable to withstand the strong dollar. It hit a fresh 7½-month low of 1.0850 dollars in late session as the greenback received a further boost from solid US housing data.
The S&P/Case-Shiller house price index, which measures house prices in 20 urban areas in the US, was up 5.1% y/y in August, slightly above expectations that it would hold steady at 5.0% y/y. The dollar hit a 3-month high of 104.87 yen after the housing figures. However, disappointing consumer confidence data later pulled the dollar away from its session highs.
The Conference Board’s consumer confidence index fell back in October, dropping to 98.6 from a downwardly revised 103.5 in September and compares with expectations of 101.0. The initial reading for September had shown a surge in the index to a 9-year high of 104.1. The dollar slipped to 104.62 yen after the data.
One of the worst performers in today’s European session was the pound, which suffered a sharp sell-off on Brexit jitters and the bullish greenback. Sterling slumped over 1% against the dollar ahead of Bank of England Governor, Mark Carney’s appearance before the House of Lords Economic Affairs Committee in Parliament later today. Adding to the pound’s woes on Tuesday were comments from UK finance minister, Phillip Hammond, who signalled that the government would not refuse requests of further bond purchases by the Bank of England. Sterling hit a 2½-week low of 1.2081 dollars in late European trading, while the euro jumped to 0.8980 pounds.
Also coming under pressure today were the Canadian dollar and the Chinese yuan. The Canadian dollar was back near 7-month lows following confusion over comments made by Bank of Canada Governor, Stephen Poloz. On Monday, Poloz appeared to contradict earlier comments when he said the BoC would wait 18 months before deciding on easing measures. He today clarified the remarks were not in reference on monetary policy, indicating that the BoC could soon cut rates. This helped the greenback climb to 1.3360 versus the loonie in late session.
The yuan meanwhile, touched a fresh 6-year low of 6.7809 per dollar today as the PBOC continued to set a weaker midpoint, in line with the dollar’s gains.
Coming up later in the day, the API weekly crude stock inventories for the US as well as a speech by ECB President Mario Draghi in Berlin will be watched.