EURUSD Little Changed as German Slowdown Continues, Focus on ECBs Draghi

EUR Analysis and Talk point

• EURUSD Unchanged Despite Soft IFO

• Markets Eye Draghi Speech

The Euro was unchanged against the dollar and the sterling as the IFO Business Climate for February 2019 missed expectations at 98.5 (Exp. 98.9), however, the prior reading had been revised higher to 99.3 from 99.1.

As business climates is at its lowest since January 2015, the assessment of current conditions comes in at 103.4, its lowest since February 2013, and future expectations come in at its lowest since November 2012 at 93.8. After the release of the figures, the EURUSD has continued its scarce volatility with a marginal move as the pair continues to look for developments in the US-China trade talks to consolidate a direction. ECB President Draghi is expected to give a speech later today where he is expected to remain dovish about the likelihood of a future rate hike.

ECB Minutes Show Policymakers Considering Fresh Stimulus, EURUSD Holds Steady

What this figure mea

The IFO Business Climate measures business sentiment about current conditions and their expectations for the next 6 months. Constructed as the % share that are optimistic and the % share of those that are pessimistic, a higher than expected reading should be taken as a bullish sign for the euro, whilst a lower than expected figure should be taken as bearish.

Economic outlook

For years Germany has been the driver of Eurozone economic growth, but after a notable slowdown in its own growth in 2018, there is no sign of a rebound in early 2019, as recent figures reveal the European economy is facing stagnation. Feared US tariffs on EU car exports could have a tough impact on Germanys manufacturing outlook, which coupled with a global economic slowdown have led to forecasts of a 1.5 per cent growth in GDP for 2019, which would mark a second consecutive annual slowdown.

Macroeconomic figures released in the last month have painted a mixed picture for the German economy and its future growth expectations:

• GD

Q4 GDP figures released last week showed that Germany had narrowly missed recession at the end of 2018. The zero-growth reported followed a previous quarter contraction of 0.2%.

• PPI

German producer price index for the month of January beat expectations but was still below the figure for December. Prices rose 2.6% in January, which beat the expectation of just a 2.20% increase, but remained below the 2.7% increase in December.

• PMI

Purchasing Managers Index was up to a four-month high of 52.7 backed by an increase in the services sector, coming in at 55.1, whilst manufacturing continued to decline to 47.6, staying below the 50 line that indicates a contraction in the industry.

EURUSD Price Struggling as PMI Data Warns of Feeble Q1 EZ Growth

• Zew Economic sentiment

The ZEW Economic Sentiment for the month of February was revealed on Tuesday, coming in at -13.4, a slight recovery from last month‘s -15, but way below its long-term average of 22.4. This figuremeasures the outlook on the economy in the next 6 months, with a value above 0 indicating a positive outlook on the economy and a value below 0 a negative value on the economy. Zew’s president Achim Wambach said “they do not expect a rapid recovery of the slowing German economy”.

There is no doubt that the figures show that the German and European economy are facing a period of slow growth but, although many figures are seeing declines, they are not as bad as feared, as expectations for the latest economic releases have been consistently worse than actual figures released. This may be an indication that markets have braced themselves for a steeper worsening of economic conditions than the one currently unfolding, on the back of turbulent times for global economics, led mainly by the US-China tariff war and the uncertainty of Brexit.

EURUSD Fragility Continues After Weak German ZEW Release

EURUSD PRICE CHART: 1-minute Time-Frame (Intraday)

IG Client Sentiment – Data shows 63.1% of traders are net-long with the ratio of traders long to short at 1.71 to 1. In fact, traders have remained net-long since Feb 04 when EURUSD traded near 1.14345; price has moved 0.8% lower since then. The number of traders net-long is 0.5% higher than yesterday and 17.8% lower from last week, while the number of traders net-short is 0.1% higher than yesterday and 15.7% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

Recommended Reading

Eurozone Debt Crisis: How to Trade Future Disasters – Martin Essex, MSTA, Analyst and Editor

KEY TRADING RESOURCES:

• Just getting started？ See our beginners guide for FX trader

• Having trouble with your strategy？ Heres the #1 mistake that traders make

• See our Q1 forecasts to learn what will drive FX the through the quarter.

--- Written by Daniela Sabin Hathorn, Junior Analyst