The Euro was unable to hold above the 1.23 level during Tuesday and drifted weaker to 1.2260 ahead of the New York opening. The dollar held a slightly firmer stance in Asia on Wednesday and was holding close to 1.2265 in early Europe before advancing after the German data.
Fed Governor Olson stated that the central bank was watching inflation very closely and this offered mild dollar support with markets putting the chances of a March interest rate increase at close to 60%. The housing data will be watched closely on Wednesday with the dollar vulnerable if there is a weak figure for home sales.
The Euro-zone data was stronger than expected with a 4.9% increase in industrial orders for November while the German IFO index for January rose to 102.0 in January from 99.7 the previous month and this combination will reinforce confidence over the economic outlook. There will also be expectations of further ECB interest rate increases and the shift in interest rate expectations will continue to offer background Euro support. Longer-term yield spreads did, however, stabilise on Tuesday which will limit near-term dollar selling pressure.
The Richmond manufacturing index was weak for January, but markets will be looking for further evidence on the economic trends. Markets will be looking ahead to the US GDP data on Friday to help determine near-term interest rate expectations and dollar direction with the crucial Fed decision next week.
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