In just three months, activity surveys in Germany went from showing slower momentum to effectively arguing against any optimism on the economic outlook. This was the case for the July IFO, published yesterday, which fell markedly. The theme of Germany being the sick man of Europe is understandably re-gaining traction, but what does it mean for the Euro, ING’s FX strategist Francesco Pesole notes.
1.0850 works as a near-term anchor for EUR/USD
“In the medium run, it probably suggests the steadily declining fair value of EUR/USD will remain depressed, hindering the kind of multi-quarter appreciation that would be consistent with other valuation metrics, like PPP. Markets made their call on two ECB cuts some time ago, and a worsening growth picture is not enough to drive bets on three cuts as long as wages and inflation prove sticky.
“Today, we’ll be looking at the ECB inflation expectations surveys. With even hawks like Joachim Nagel implicitly endorsing market pricing by saying the ECB should be able to cut if data stays on course, major swings in ECB pricing appear unlikely.”
“EUR/USD remains stable amid wide moves in G10 FX. We suspect this is down to the euro’s liquidity attractiveness, and we doubt we’ll see a break from the ranges today, with 1.0850 still working as a near-term anchor.”
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