EUR/USD higher despite soft German business climate

The euro is up slightly on Thursday. In the North American session, EUR/USD is trading at 1.0863, up 0.22% on the day at the time of writing.

German business climate slips to 5-month low

Germany continues to post weak data this week. Once the locomotive of Europe, Germany’s economy has struggled, earning it the dubious label ‘the sick man of Europe’. The Ifo Business Climate index eased in July, as pessimism has increased about the health of the economy. The index dropped from 88.6 to 87, shy of the market estimate of 88.9 and the lowest level since February. Ifo president Clemens Fuest said that the report indicates that “the German economy is stuck in the crisis”.

This week’s PMI reports were lower than expected, as manufacturing has been in contraction territory for two years. The services sector is showing growth, but the July reading of 52.0 was the lowest since services clawed back into growth territory. The 50.0 line separates contraction from expansion.
The soft data will raise doubts about a modest rebound in the eurozone and supports the case for additional rate cuts by the European Central Bank.

US GDP jumps to 2.8%

US economic growth was much stronger than expected in the second quarter. GDP climbed 2.8% y/y, double the 1.4% rate in the first quarter and blowing past the forecast of 2.0%. An increase in consumer spending fueled the strong gain. On the inflation front, there was good news as the personal consumption expenditures price index, a key measure for the Federal Reserve, eased to 2.6%, down from 3.4% in Q1.

The strong GDP report has trimmed market expectations for a rate cut in September to 85%, down from 90% a day ago, according to the CME’s FedWatch. The Fed is widely expected to stay on the sidelines at July 31 meeting.

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EUR/USD Technical

• EUR/USD continues to test resistance at 1.0854. Above, there is resistance at 1.0901
• 1.0825 and 1.0778 are the next support levels

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