EUR/USD – Steady Despite Softer German Business Climate

EUR/USD has edged higher on Tuesday, as the pair trades slightly above the 1.36 line in the European session. On the release front, German Ifo Business Climate fell short of the estimate and dipped to a six-month low. It's a busy day in the US, highlighted by CB Consumer Confidence and the second key housing event this week, New Home Sales.

German Ifo Business Climate lost ground for a second straight month, dipping to 109.7 points, short of the estimate of 110.3 points. It was the indicator's lowest level in 2014, but the indicator still remains at high levels, close to the 110 mark. This release comes on the heels of Eurozone PMIs, which also softened in May.

Eurozone PMIs are key indicators of growth in the services and manufacturing sectors, and across the board, the May numbers were a disappointment. The German and Eurozone figures remained above the 50-point level, pointing to expansion. However, the French figures remained below the 50 mark, pointing to continuing contraction in the manufacturing and services sectors of the Eurozone's second largest economy. A worrying trend is that with the exception of Eurozone Services PMI, all of the PMIs posted their weakest reading in 2014.

Unlike his peers at the BOE and Federal Reserve, ECB head Mario Draghi is not being coy about possible interest rate hikes. On the weekend, Draghi stated flat out that he did not foresee the ECB raising rates before 2017. Draghi noted that the ECB had extended access by European banks to unlimited liquidity until that time, and that the Eurozone recovery was still weak. However, traders should not treat Draghi's remarks as etched in stone, as the ECB will likely have to raise rates if the economy recovers faster than anticipated.

There were no surprises last week from the Federal Reserve, which continued to taper its QE program. The Fed reduced the scheme by $10 billion, to $35 billion/month. If all goes as planned, the Fed could wind up QE in the fall. The Fed also hinted that interest rates will continue to stay low for the foreseeable future, which likely means that we won't see any rate hikes before the first quarter of 2015. With regard to economic activity, the Fed noted that the recovery is continuing, but it reduced its forecast of economic growth to 2.1-2.3%, down from an earlier forecast of around 2.9 percent. The bottom line? There were no dramatic items in the Fed statement, with one analyst describing current Fed policy as "steady as she goes".

EUR/USD 1.3621 H: 1.3625 L: 1.3593