Forex - Euro

LONDON (Thomson Financial) - The euro is steady ahead of a key German business survey, which is likely to be weighed down by the recent turmoil in the financial markets.
Analysts expect the ZEW business confidence indicator to drop in reaction to the ongoing turmoil in financial markets. The expectations component is forecast to drop to -5 in August from +10.4 in July, while the current economic sentiment is expected to retreat to 84 from 88.2.
'Therefore, the euro won't get major support from the fundamental side,' said Carsten Fritsch, currency strategist at Commerzbank Corporates & Markets.
'It would need a notable fall in risk aversion, which doesn't seem on the cards just yet, in order to see the euro moving higher, although the situation on financial markets has stabilised after the Fed decided to cut the discount rate on Friday,' he added.
The market worry is that the drop in sentiment may begin to impact upon actual economic growth, especially as second-quarter economic growth in the single currency zone's largest economy came in lower than anticipated.
'At other crisis points such as the Asian Crisis in 1998, September 11 and the start of the second Gulf War, a softer ZEW has been a precursor for a weaker IFO,' said Stuart Bennett, analyst at Calyon.
'Both of these surveys tend to be accurate indicators for German GDP growth and suggest that the engine behind the euro zone recovery risks stalling, despite the Bundesbank's optimism,' he added.
The German central bank yesterday struck an upbeat tone, describing the recent stock market correction and the US Federal Reserve's surprise decision last Friday to cut its discount rate by 50 basis points as a 'welcome normalisation'. It added that both German and global growth prospects remain favourable despite the slowdown in the second quarter.
Elsewhere, the yen recovered further ground as equities came well off their highs, with the positive sentiment following the Fed's rate cut waning.
The Japanese currency suffered in the wake of Friday's Fed announcement, coming well off the two-and-a-half-month highs reached against the dollar late last week as a measure of risk appetite began to return to the market.
This trend has reversed moderately, however, with most feeling that the boost to equities and risky assets from the Fed's move, which most interpreted as a prelude to a cut in interest rates next month, will be short-lived.
Investors will be interested to see what Richmond Fed President Jeffrey Lacker, one of the most hawkish members says about the current situation when he delivers a speech later.
'It would be interesting to see if he tones down his comments especially with the FOMC recently focusing its attention on the downside risks to growth rather than inflation being its predominant concern,' said Ian Stannard, currency strategist at BNP Paribas.
'While calming words from Fed's Lacker would allow asset markets some stability today, we highlight the downside risks of the economy and the general flow of financial and credit news,' he added