Wait for FOMC monetary policy statement tomorrow continues after weak IFO sends EURUSD back to support.

JPY remains weak despite crumbling equity markets. US Consumer Confidence in focus today.

MAJOR HEADLINES – PREVIOUS SESSION

• Germany Jun. IFO out at 101.3 vs. 102.5 expected
• The US S&P500 stock index closed at a new near 3-month low yesterday

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Germany GfK Consumer Confidence (0610)
• France May Consumer Spending (0645)
• France May Housing Starts and Permits (0645)
• France Jun. Business Confidence and Production Outlook Indicators (0650)
• UK May BBA Loans for House Purchase (0830)
• US Apr. S&P CaseShiller Home Price Index (1300)
• US Jun. Consumer Confidence (1400)
• US Jun. Richmond Fed Manufacturing Index (1400)
• US Apr. House Price Index (1400)
• US Weekly Consumer Confidence (2100)
• Japan Merchandise Trade Balance (2350)
• Japan May Corporate Service Prices (2350)
• Japan Jun. Small Business Confidence (0500)

Market Comments

After two months of reacting strongly to the IFO surprise, the market decided to make it a "surprise reaction hat-trick" with yesterday's release. The disappointing number sent EUR tumbling versus the USD. Especially alarming was the drop in the IFO Expectations index, a fall of 2.5 points, the largest drop in almost 2 years and the lowest level since 2005. This encourages the idea that the EuroZone's main economic engine is on a weakening trajectory, though optimists (none of those around here at the moment!) might point out there was a false indication of this kind back in 2005 in the expectations index.

But if we look across the market, we can see that the EUR did not fare better or worse than other currencies on average, so the number may have mostly just been an excuse to reel in short USD positions across the board yesterday ahead of tomorrow's very important FOMC meeting and the monetary policy statement, which will doubtless contain important updates on the Fed's latest reading of the situation. This meeting seems to be one of the more important ones in recent memory (though poor Mr. Bernanke has seen far too much action in his relatively short stint at the helm) considering how the inflation theme has gripped markets around the world.

In the background, credit worries are rising once again with the downgrades of MBIA and Ambac, the so-called monoline bond-insuring companies that are in focus for the second time around. The dangerous aspect of this downgrade is that it means "ipso facto downgrades for the paper they have insured" according to CreditSights analysts quoted in a Bloomberg article out yesterday. This kind of development warms up a range of "systemic risk" scenarios that justifiably have markets concerned. Still, we're seeing a rising pressure in some of the risk spreads so far, no signs of outright panic... Meanwhile, despite the worries, government bond markets are having a hard time staging a sustainable rally with the prevalent inflation worries. The combination of higher cost push inflation and tighter credit markets is an extraordinarily bearish mix for the world economy.

JPY and CHF remain on the weak side as we mull whether tomorrow's FOMC statement will finally serve as a catalyst to shock the carry bulls out of their complacency or whether these currencies have further to run to the downside. USDJPY is back tickling the 200-day moving average again. On a separate note, USDCAD showed promising signs of support over the last few days, but volatility may be handcuffed ahead of the FOMC for now.

Chart: EURUSD
Today and for the pre-FOMC hours tomorrow, the market may largely be a nervous waiting game. If we look at short-term technical lines in the sand for EURUSD, we have the now fairly obvious 1.5460/70 area as support ahead of the big support much lower at 1.5300/1.5285. To the upside, the 1.5580 area serves as first resistance ahead of the 55-day moving average at around 1.5615 and the actual recent 1.5650 top. Traders might consider very short dated options as a way to express a view in the coming days as it feels like the market is very uncertain where it wants to go. EURUSD weekly closes have changed direction for four weeks running now.