Dollar Weakens, but Doesn't Break

The US dollar is sporting a soft profile, with the euro making marginal news high for the year. The single currency's push higher met offers just shy of $1.3350 level, which is thought to hold a large option barrier. Above there, offers are seen near $1.3375 and then $1.3435.

The main catalyst appears to have been better than expected economic data after yesterday's disappointing PMI data. For Germany it was the IFO report that showed a further recovery, with the expectations component rising to 102. For its part the expectations component rose to 102.3 from 100.9 and the current assessment rising to 117.5 from 116.3.

Yet at the same time, we would be remiss if we did not acknowledge that the euro has generally traded firmer since the Greek deal was struck. Meanwhile, the next LTRO is around the corner. The fact of a new liquidity push (BOJ, BOE, PBOC, ECB) appears to be reducing immediate tail risks and fanning demand for the euro, foreign currencies in general, equities and emerging markets.

The UK reported stronger mortgage applications and CBI trends survey and this is helping sterling stabilize after the dovish BOE minutes yesterday took a toll.

Brent oil is trading at record levels in sterling and is near a3 year high in euro. The economic and policy consequences are only now being turned to by investors. If anything, it coupled with the data showing that the contraction is not accelerating in Europe at the start of the year should reinforce ideas the ECB is on hold, after the LTRO.

Note in this regar that the EC did cut their 2012 GDP forecasts from their late 2011 guesses, but raised its inflation forecasts.

Lastly two other developments are noteworthy. First, the pending Labour Party leadership challenge Monday in Australiaappears to be preventing the Australian dollar from participating more fully in the advance against the US dollar.

Second, Spain will reportedly formally ask the EU to raise this year`s deficit target to 5% from the 4.4% goal. Recall that this follows last year`s overshoot.