German business climate falls, euro rises

After coming off a quiet week, EUR/USD has started the week with gains. Currently, EUR/USD is trading at 1.1809, up 0.36% on the day.

The focus was on the German Business Climate, which slowed for the first time in six months. The index came in at 100.8, down from 101.8 and shy of the consensus of 102.3 points. The decline was a result of a rise in Covid cases and supply disruptions, which have weighed on the economy and soured business confidence in the eurozone’s largest economy.

ECB policy meetings don’t usually garner much attention, but last week was different. There were expectations that the meeting would shake up the currency markets, since ECB President Christine Lagarde had announced that the Bank would adjust its forward guidance with a strategy review that was released earlier in July.

In the end, the ECB shifted the language in the forward guidance, but the reaction from the markets was muted, with the euro showing only minor losses. The Bank’s new inflation target is 2%, adjusted from “below, but close to 2%”. The new guidance also states that the ECB will not raise interest rates until the inflation reaches the 2% “durably”. This gives the central some wiggle room, as even if inflation shoots above 2%, it can say that higher inflation is transient (for anyone following the Federal Reserve and its response to the surge in inflation, this argument will sound familiar).

With the changes to forward guidance, the ECB has become even more dovish. The ECB does not appear to be concerned that inflation is well below its target and shows no inclination to raise interest rates in the near future. This stance will not be helpful to the euro, which has fallen 3.3% since early June.

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EUR/USD Technical

• On the downside, there is support at 1.1737. Close by, there is support at 1.1706
• EUR/USD is testing resistance at 1.1815. Above, there is resistance at 1.1862

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