Today, the focus will remain on Germany's struggling economy. Economists at ING analyze EUR/USD outlook ahead of the German IFO sentiment survey.
German slump in focus
German manufacturing PMIs plummeted to 42.3 in February, overshadowing a modest tick-up in the service sector. Today, the IFO survey is published, and we should probably brace for a soft reading there too. The question FX analysts like us are trying to answer now is whether the Euro has already largely priced in the German slump or if other factors have prevented it from taking the hit.
We think the former explanation is more accurate, although it requires an additional key point. The FX market is trading on global risk dynamics and short-term rate differentials. The key question is therefore whether mounting evidence of German economic weakness should be associated with prospects of faster and earlier rate cuts by the ECB. President Lagarde and many of her colleagues tried to send the message that no, it shouldn’t.
Inflation – and above all wages – are the real focus, so the relative resilience of the Euro should not be surprising and the risks of a decline in EUR/USD in the short term are mostly related to USD upside potential.
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