Euro-Dollar Aided by Ifo, German GDP Upgrade and Vaccine Hopes but Analysts Warn of Consolidation

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• EUR/USD spot rate at time of writing: 1.1819
• Bank transfer rate (indicative guide): 1.1383-1.1466
• FX specialist providers (indicative guide): 1.1619-1.1690
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The Euro drew support on Tuesday from upbeat sentiment among investors, a favourable revision to second-quarter German GDP data and another increase in the Ifo Business Climate index, although analysts are still looking for the Euro-to-Dollar rate to consolidate beneath recent highs. 

Europe's single currency was higher against most majors and still quoted above 1.18 against the greenback although the upmove in EUR/USD was tempered in the wake of August's Ifo survey, which saw the Business Climate index rise from 90.5 to 92.6, leaving it just above the 92.5 anticipated by the market. 

German companies assessed their current business situation markedly more positively than last month, the Ifo Institute said, with expectations of the future also slightly more optimistic. Both manufacturing and services companies said current conditions and the six month outlook had improved in August. 

"Overall, these data only really confirm what we already know, namely that economic activity is now recovering after having collapsed during lockdown," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. "As with the PMIs, however, the key test in the next few months will be whether it stabilises at its current level, having already rebounded significantly. If it does, it will indicate the recovery is ongoing."  

The Ifo survey suggests German industry was not as impacted in August by the second wave of coronavirus infections that's begun to build in Europe's largest economy, with more than 1,500 new cases per day in the last week.  

Above: Euro-to-Dollar rate shown at 15-minute intervals.

"IFO data came in above expectations, and therefore failing to follow the PMI data's softness. Just another data point that helps keep the euro at this stretched level," says Kit Juckes, chief FX strategist at Societe Generale. "I suspect we are near the limits of high-beta EM weakness co-existing with the dollar falling against the other G10 currencies. Either we will see a broader EM rally, or the dollar will bounce against (particularly risk-sensitive) G10 and other low-beta currencies. One way or another, the jaws have to close."

EUR/USD was quoted at 1.1837, having been as high as 1.1965 last week ahead of the release of the disappointing PMI data and the Dollar comeback. (If you have looming international payment needs and are looking to lock in current exchange rates for use at a future point, there are tools available that will help you protect your budget).

Friday's flash IHS Markit PMI data told a different story with regards to Germany's and the Eurozone's economic recovery, with Germany's services sector rebound fading sharply while France and the wider Eurozone saw both manufacturing and services numbers disappoint expectations in August.

August's Ifo survey came hard on the heels of an upward revision to Destatis' initial estimate of German GDP growth in the second quarter. Germany's statistical office said Tuesday that the economy contracted by -9.7% in the second quarter, less than the initial -10.1% contraction announced last month. 

"The Euro is facing current headwinds of both an increasing case count in the region and the recently weaker data, and all of this is juxtaposed with improving case count in the US as well as better data there. While this shift in dynamic is noticeable and important, I am personally not of the view that it means the Euro trend is over," says the J.P. Morgan FX dealing desk in London, in a morning note. "Nonetheless, the Euro could certainly continue to consolidate or correct further in the near term, which is why we are advocating for some restraint in position size at this stage. 1.1755/65 and 1.1695/05 are key levels on the downside now and well worth adding into if we see tests of them."

Above: Euro-to-Dollar rate shown at daily intervals. 

Europe's single currency was boosted earlier in the Tuesday session as investors stocks and other risk assets higher in response to President Donald Trump inciting hope that a coronavirus treatment could soon be available even if efforts to find a vaccine fail.

The White House has secured a regulatory blessing for the use of blood plasma from recovered coronavirus patients as a treatment for those struck down by the disease, given that it can be used to pass on antibodies that can be helpful for fighting it. Improved headlines concerning U.S.-China trade negotiations also aided risk appetite.

"Signs of détente between the U.S. and China on trade issues helped support stocks. If the two powers can get past the various issues that have arisen of late and keep moving forward with trade negotiations then markets are likely to take a broadly positive view of the situation," says Chris Beuchamp, chief market analyst at IG. "Focus will increasingly be the Jackson Hole speech from Jerome Powell. Much appears to be riding on this, but it could easily be a case of ‘buy the rumour, sell the fact’ for equities and the inverse for the US dollar."

The Euro remains close to two-year highs while the negatively-correlated Dollar Index has continued to languish near two-year lows, with a wide range of analysts looking to see a consolidation comfortably beneath the 1.1965 high struck on August 18. Europe's single currency has risen more than 10% since late May, with many attributing much of the move to an improving growth outlook following the unanimous endoresement by EU leaders of the Brussels' coronavirus recovery fund or spending programme.

"EUR/USD is flirting with the $1.18 handle this morning. The $1.17 support handle may be the trigger for a deeper sell off if the dollar rebounds, which may drag GBP/USD lower too," says George Vessey, a currency strategist at Western Union Business Solutions. "The extremely high speculative long EUR positions (more bets on Euro appreciating than depreciating) means it’s harder to see the Euro climbing much higher from these levels. Optimistic Euro buyers still have their eyes set on the $1.20 handle versus the US Dollar, which may be enough to drag GBP/EUR under the key €1.10 mark.”