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26.10.2020 03:30 PM
EURUSD: euro is under pressure amid Germany's weak economic data

In the first half of the day, investors' attention was devoted to the German business sentiment report. Market players expected a decline in the business climate index. However, the final data turned out to be much worse than economists forecast, leading to a depreciation of the euro in the short term.

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The second wave of the coronavirus became the reason for such weak results. The situation is not that bad as to impose quarantine restrictions similar to those that were introduced in the spring of 2020. Nevertheless, it can deteriorate Germany's economic outlook. Apart from that, the coronavirus has an adverse impact on the country's recovery in the fourth quarter. The German authority will, of course, try to prevent the service industry from collapsing and will not close all shops and companies because it can come as a severe blow to the industrial sector. Notably, the industrial sector is the only one that helps Germany to stay aloft. Closures in the service sector are likely to lead to another decrease in retail sales, aggravating the situation in the long term.

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Survey data from Ifo Institute showed that German business sentiment weakened in October. The business climate index fell to 92.7 in October from revised 93.2 in September. The current conditions indicator rose more-than-expected to 90.3 from 89.2 a month ago. The expectations indicator came in at 95.0, down from revised 97.4 in September. Notably, Friday's data indicated an increase in business activity in the manufacturing sector to 1.6 points from -0.5 in September. As a result, the business climate index improved for the first time since June 2019, returning to positive territory. Meanwhile, business activity in the service sector worsened significantly in October due to the second wave of the coronavirus. The index fell to 3.9 points from 6.9 points in September.

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Now let's get to the upcoming meeting of the Executive Board of the European Central Bank, which is going to take place during the week, and the issue of monetary policy. Thus, experts believe that the current pandemic emergency purchase programme (PEPP) is suitable only for low interest rates and is not enough to boost inflation. In autumn, the inflation rate in the euro area slowed down. Moreover, it is expected to continue falling. Therefore, market participants expect more than just an expansion of the PEPP from the ECB. However, the regulator is unlikely to take any actions during the upcoming meeting. Still, ECB President Christine Lagarde will definitely talk about the possibility of negative interest interest rates. This will put the euro under additional pressure or will limit its upward potential at least.

As for the technical analysis of EUR/USD, pressure on risky assets returned immediately after the release of Germany's weak economic data. Currently, buyers need to return to the resistance level of 1.1830 and the price may rise to the upper border of the sideways channel, the level of 1.1865. The pressure on the euro will increase if there is a breakout at 1.1790, the lower border of the sideways channel. In such a case, the price may go down to the lows of 1.1760 and 1.1705.

Jakub Novak,
Analytical expert of InstaForex
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