Euro edges up as Business Climate improves

EUR/USD has edged higher on Monday. In the European session, EUR/USD is trading at 1.0610, up 0.24%.

The week started on a positive note as German business confidence climbed in December. The Ifo Business Climate index rose to 88.6, up from 86.4 in November and its highest level in five months.

Bundesbank revision – growth down, inflation up

The Bundesbank does not appear to share in the optimism. Its biannual economic forecast found that Germany’s economy will contract through the middle of 2023, and businesses and consumers will continue to be hit with high energy costs. The war in Ukraine has been weighing heavily on the German economy, and the Bundesbank’s latest economic projection sees a 0.5% decline in GDP in 2023, compared to a 2.4% gain in the June forecast. Inflation has been revised to 7.2% in 2023, up from 4.5% in June. The risk to economic growth has been tilted to the downside, due to possible shortages in energy supplies. As for inflation, the risk is tilted to the upside. The updated forecast mirrors the latest ECB projections for the eurozone, which raised inflation while lowering growth.

With the Bundesbank and the ECB projecting that inflation will accelerate, we can expect further rate hikes from the ECB, which delivered a 50-bp increase last week. The ECB rate statement said rates would have to “rise significantly” in order to curb inflation, and ECB President Lagarde said that the central bank could deliver up to three more rate hikes. Lagarde was hawkish, saying that the 50-bp hike, which came after two 75-bp hikes was not a pivot and that the ECB would not be slowing down.

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EUR/USD Technical

• EUR/USD tested resistance at 1.0610 earlier today. Above, there is resistance at 1.0714
• 1.0484 and 1.0380 are providing support

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