Forex - Euro surges after forecast-busting Ifo

02.26.08, 4:30 AM ET

LONDON (Thomson Financial) - The euro surged higher after a closely-watched survey into German business sentiment came in above market expectations, further reinforcing expectations that the European Central Bank will not be cutting rates any time soon.

Earlier in the session, the euro had come under pressure on talk the Ifo would disappoint to the downside.

In the event, the research institute revealed that its headline business climate index rose to 104.1 in February from 103.4 the previous month. Analysts polled by Thomson Financial News were expected the index to drop to 102.7.

The talk in the market before the release was that it would fall to 101.0 and that pushed the euro down to 1.4777 usd from 1.4839 usd.

'Offers into the 1.4830/40 usd area will now come into view as the pair looks to regain the losses out through amid the early weak headline speculation,' said Thomson IFR Markets analyst Matthew Foster Smith.

The IFO is likely to stoke talk that the European Central Bank's next forecasts in early March will be relatively buoyant, thereby fuelling talk that the central bank will keep borrowing costs on hold for a while longer.

The ECB has kept its key refi rate unchanged at 4.00 pct for eight months, unlike the US Federal Reserve and the Bank of England, both of whom are cutting rates, though at far different tempos. This has helped underpin the euro.

'The Fed's contrasting tone with that of the ECB and investors' search for higher returns should keep the euro supported for now even though we retain our medium to long term bearish view on the currency,' said Ian Stannard, currency strategist at BNP Paribas .

With most ECB watchers expecting the central bank to stay pat until June, the rhetoric of policy-makers will be closely monitored. A speech today from Axel Weber, the president of the Bundesbank, could well be important in this regard.

'Any sense that this typically hawkish policymaker is more nervous about growth could provide the excuse for the euro to push lower once again, and we continue to target 1.4450 usd,' said Daragh Maher, senior FX strategist at Calyon.