EUR/USD slips to 10-week low after soft German business climate

• German business climate falls for fourth consecutive month
• Fed Chair Powell and ECB President Lagarde address Jackson Hole summit

The euro has posted limited gains at the start of the trading week. In the North American session, EUR/USD is trading at 1.0803, up 0.08%.

German Ifo Business Climate declines

The week ended on a sour note as German Ifo Business Climate fell for a fourth straight month in August to 85.7, down from an upwardly revised 87.4 and shy of the market consensus of 86.7. Germany’s GDP flatlined in the second quarter, after two straight declines. The eurozone’s largest economy is sputtering and a string of weak data provides support for the ECB to take a pause at the September meeting.

Powell cautious about rate path ahead

Federal Chair Jerome Powell delivered the keynote speech at the Jackson Hole summit on Friday and his message was one of caution and on the hawkish side. Powell reiterated that the battle to lower inflation to the 2% target “still has a long way to go”. The Fed has lowered inflation to around 3% but the hardest part could be bringing it down to 2%.

With regard to rate policy, Powell was cautious, saying that the Fed would “proceed carefully” in deciding whether to raise rates or pause and wait for additional data. There was no mention of rate cuts, a signal that the Fed isn’t looking to trim rates anytime soon. The markets raised the odds of a rate hike in September in response to the speech, from 14% a week ago to 21% at the time of writing.

ECB President Christine Lagarde also attended the Jackson Hole meeting but like Powell, played it safe with remarks that we’ve heard more than once in the past. Lagarde said that the ECB’s rate path would be data-dependent at each meeting and that it was critical that inflation expectations remained anchored at the 2% target. Lagarde tried to sound optimistic, saying she was confident that inflation numbers would look different at the end of 2023.

Eurozone inflation is heading in the right direction but is still high at 5.3%. The central bank meets next on September 14^th and it’s unclear whether the ECB will raise rates for an eighth straight time or take a pause and monitor how the economy is performing. The benchmark rate is relatively low at 3.75%, but the eurozone economy has not looked good and higher rates increase the chances of the weak economy falling into recession.

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EUR/USD Technical

• EUR/USD is putting pressure on resistance at 1.0831. The next resistance line is 1.0896
• 1.0795 is a weak support level. Below, there is support at 1.0731

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