Forex Daily Outlook – March 15, 2011

By ForexMansion.com

Euro Climbs to Test 1.40

The Euro pushed higher as interest rate differentials continue to make investing in Euro move attractive relative to other currencies. Solid economic data points also helped the Euro remain robust.

Industrial output rose 0.3% in January and was 6.6% stronger on a year over year basis, according to The European Union's Eurostat agency. In December, output grew 0.3% from the previous month and 8.8% from a year earlier despite severe winter weather.

The January figures in-line with market consensus estimate of increases of 0.4% month-to-month and 6.4% on the year. On a monthly basis, output growth in France picked up to 1.1% in January from 0.2% in December, but in Germany it slowed to 0.1% from 1% and in Italy output dropped 1.5% following a 0.2% increase in December.

Tomorrow market participants will focus on the Employment Change which is scheduled to be released at (10:00 GMT), as well as the German Zew Survey (10:00 GMT). A strong number will push the EUR/USD toward resistance at 1.4250.

Higher interest rates in both the US and Europe should generate a rally in both the USD/JPY and EUR/JPY following the impact of the earthquake and the nuclear disaster in Japan. The rally in the Yen down to 81.20 was a function of the market reaction following January 17, 1995 Kobe earthquake as a guide which saw the Yen rallying by 20%. The Kobe quake wiped out $100 billion of the economy, but the insurance loss was a moderate.

Eventually, rebuilding of many Japanese cities and power infrastructure will create thousands of jobs and potential create a expansion of which Japan has not seen in years. The BOJ can provide additional liquidity and it may be enough to get it over its understandable reluctance to increase its purchases of Japanese government bonds.

Tomorrow Fed Decision (18:15 GMT) on interest rates could move the USD/JPY. Market participants expected the statement to reflect as continued support toward the current QEII. Any mentioned of providing additional liquidity to help Japan could take the dollar lower.