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German Ifo Index Beats Expectations Ahead of ECB Decision

German Ifo Index Beats Expectations Ahead of ECB Decision

Martin Essex, MSTA, Analyst

Euro Talking Points:

- The business climate in Germany improved unexpectedly in January, according to Ifo.

- That underlines the European Central Bank’s problem in deciding when to tighten monetary policy.

- ECB President Mario Draghi may try to talk down the Euro at his press conference later today.

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The business climate in Germany improved unexpectedly in January, according to the Ifo research institute. Its headline index beat predictions, rising to 117.6 from 117.2 in December rather than easing to 117.0 as analysts had forecast. The Ifo current conditions index also improved unexpectedly but its expectations index fell further than forecast.

Earlier, the GfK market research company reported a pickup in consumer confidence in Germany that beat predictions too.

The ECB’s dilemma

Against this backdrop, European Central Bank President Mario Draghi will need to tread carefully when he holds his press conference later today after an expected decision by the ECB Governing Council to leave all its monetary policy settings unchanged.

The markets in general, and Euro traders in particular, will be listening out for any hints by Draghi as to when the Euro-Zone central bank will end its current stimulus program, probably towards the end of this year. A rise in interest rates is not expected until well after that.

Given the resilience of the Euro-Zone economy, he might be expected to take a hawkish line when he meets the press. However, inflation in the region remains well below target and Draghi will therefore likely leave the ECB’s current guidance on policy unchanged and may even try to talk the Euro down.

Impact on EUR

EURUSD edged ahead after the Ifo index was released after earlier touching its highest level since December 2014 as US Dollar weakness persisted. Concerns about a move towards protectionism in the US, the imposition of import tariffs on washing machines and solar panels and comments by US Treasury Secretary Steven Mnuchin welcoming a weak Dollar have all helped undermine the US currency in recent days.

EURUSD Price, Daily Timeframe, (October 10, 2014 to January 24, 2018)

German Ifo Index Beats Expectations Ahead of ECB Decision

Chart by IG

If Draghi decides to take a dovish line, stressing that no rate increase is on the cards until next year, EURUSD might well lose some of its recent resilience. However, a change in forward guidance, preparing the ground for a tightening of policy, is not expected until April.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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