Key talking points:

• German IFO data confirms slowing economic recovery
• EUR / USD hovering above 1.1750
• Luis de Guindos suggests a higher macroeconomic pprojections for the euro area

Germany’s IFO indicator confirmed what we already knew: the pace of economic recovery in the second half of the year has run out of steam somewhat. Business expectations for the month of August fell back below 100 after three consecutive months above the three-digit line, with the business climate also falling below 100 and entering lower 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 managed to beat expectations and last month’s reading, marking its highest level since April 2019 and 7 months of straight improvements. Rising current conditions and falling future expectations underscore that the pace of growth is likely to improve further in the current months, but the longer-term outlook is weakening.

The drop in IFO data is not much of a surprise given the multitude of previous sentiment readings that have shown lower morale regarding the economic recovery. This is probably the reason why the reaction to the euro has been quite moderate so far, with EUR / USD retreating slightly before hitting a new daily high at 1.1760, in line with yesterday’s high. I’m guessing traders are considering new information that may impact the currency, whether through more in-depth central bank information or covid-19 news, and so IFO data was not used. only to confirm the already dominant theme of slower growth, and not really provide any new information to consolidate a direction.

The fight for the bulls continues to consolidate above 1.18 which has been repeatedly rejected over the past month. The false breakout in early August only served to attract further selling momentum which has now built strong resistance along the way, but the pair has managed to break out of the key range (1.17 – 1.1738 ) observed over the past few days, which could be a sign of further gains to be built. We also have the 50 day moving average which is converging towards the 1.18 mark, so it is likely to remain a difficult area to break through, but a break above this would likely see the bulls gain strength. ‘magnitude around 1.19.

EUR / USD Daily graphic

We also had the Vice-President of the ECB Luis de Guindos this morning, and the key message that emerges is that the central bank may revise upward macroeconomic projections for the eurozone in September, as recent data has shown some improvement. As a reminder, the ECB is meeting on 9e September, but expectations do not foresee any change in monetary policy, with rates expected to remain unchanged until 2024 and a decline in assets on the horizon for the euro area, with the ECB seen as one of the banks most accommodating power plants on the market.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin