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German IFO Data Confirms Weaker Momentum, EUR/USD Struggling to Break Out

German IFO Data Confirms Weaker Momentum, EUR/USD Struggling to Break Out

Daniela Sabin Hathorn, Analyst

Key Talking Points:

  • German IFO data confirms slowing momentum in economic recovery
  • EUR/USD hovering above 1.1750
  • Luis de Guindos suggests higher macroeconomic projections for the Eurozone

Germany’s IFO indicator has confirmed what we already knew: the pace of economic recovery in the second half of the year has lost some momentum. Business expectations for August have dropped below 100 once again after three consecutive months above the three-figure line, with the business climate also dropping below 100 and coming in weaker than expected. Aside from the previous two months, this is still the highest reading since March 2019 and therefore continues to show a good perception of business conditions in Germany.

The current assessment has managed to come in above expectations and last month’s reading, marking its highest level since April 2019 and 7 months of consecutive improvements. The rise in current conditions and drop in future expectations highlights that the pace of growth is still expected to improve in current months but the longer-term outlook is weakening.

The drop in the IFO data is not really a surprise given the host of previous sentiment readings that had been showing a decrease in morale regarding the economic recovery. That is likely the reason why the reaction in the Euro has been pretty muted so far, with EUR/USD pulling back slightly before marking a new daily high at 1.1760, in line with yesterday’s high. I guess traders are looking ahead at new information that can impact the currency, either by way of more central bank insight or covid-19 news, and so the IFO data has only served to confirm the already overarching theme of slower growth, and not really provided any new information to consolidate a direction.

The struggle for bulls continues to be consolidation above 1.18, which has been rejected a few times over the past month. The false breakout at the beginning of August only served to attract new selling momentum which has now built some strong resistance along the way, but the pair has managed to break out of the key range (1.17 – 1.1738) seen over the last few days which could be a sign of further gains to build. We also have the 50-day moving average converging at the 1.18 mark so its likely to remain as a tough area to crack, but a break above it would likely see bulls gathering momentum towards 1.19.

EUR/USD Daily chart

German IFO Data Confirms Weaker Momentum, EUR/USD Struggling to Break Out

We’ve also had the ECB vice president Luis de Guindos speaking this morning and the key message from it is that the central bank could revise upward the macroeconomic projections for the Eurozone in September as recent data has shown some improvement. As a reminder, the ECB is meeting on the 9th of September but expectations are for no change in monetary policy, with rates expected to be left unchanged until 2024 and tapering of assets far off the horizon for the Eurozone as the ECB is regarded as one of the most dovish central banks out there.

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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