EUR/USD Exchange Rate Could be About to Make a Big Move Lower

The EUR to USD conversion is holding onto support at 1.10 but analysts tell us the pair could be about to make a notable move lower.

The euro has moved lower against the US dollar dragged by the under-fire pound and growing expectations that the ECB will announce fresh policy rates in March.

The recent selling pressure on the single currency is driven, "entirely by Brexit concerns because Britain's exit from the European Union would undoubtedly cause uncertainty for the Eurozone economy and volatility for European markets," says Kathy Lien at BK Asset Management.

The EUR/USD has also struggled in the wake of disappointing business data from the IFO institute which published its latest Business Sentiment survey this week.

The results of a survey which questions 7,000 businesses in Germany about their view of the economy has shown a dip in mood, increasing pressure on the Central Bank to use necessary force.

The German data showed a sharp drop in confidence to a 14-month low as a result of concerns about the outlook for the global economy, and its impact on the euro-zone.

Both the Business Climate and the forward-looking Expectations subcomponents of the survey came out well below expectations, falling from 107.3 to 105.7 in the former and 102.4 to 98.8 in the later.

The Current Assessment meanwhile showed a rise to 112.9 from 112.5, beating expectations of a fall to 112.00.

The data will have German authorities worried. Indeed, Bundesbank President Weidmann who has often resisted more stimulus from the ECB has said that "it is clear developments warrant stimulus review," and "ECB policy must be powerful and effective."

While he warned that any measures mustn't be counterproductive, "it is becoming increasingly clear that one of Europe's most influential monetary official is open to the idea of more easing," says Lien.

Euro / Dollar Forecast Lower, But Support is Strong

In the wake of the data we have seen currency forecasters warn that the euro is likely to fall further.

"Weaker economic data and the risk of Brexit should lead to further losses in the currency," says BK Asset Management's Lien.

However, Lien concedes that the 1.10-1.1043 support area is proving "extremely magnetic for EUR/USD."

Strategists at Hang Leong bank reckon it is a matter of time before this support zone breaks and note EUR remains bearish against a firm USD amid improving risk appetite that is likely to continue fuelling carry trade.

"EURUSD breaking below 1.1043 gives scope for further dips. We take aim at 1.0965 going forward," say strategists.

Germany's Glass Half Empty?

According to Hans Werner-Sinn, director of the IFO institute, the survey results showed widespread pessimism amongst German businesses, particularly about the future:

“The majority of companies were pessimistic about their business outlook for the first time in over six months.

Nevertheless, assessments of the current situation were more positive:

“Assessments of the current business situation, by contrast, were slightly better than last month.

Sentiment amongst manufacturers had particularly suffered:

“German businesses expressed growing concern, especially in manufacturing.”

The one thriving area of the economy according to the survey report, appeared to be Construction:

“Construction was the only sector in which the business climate index rose. This was due to assessments of the current business situation, which hit a new record high. Business expectations, on the other hand, deteriorated for the fourth month in succession,” says Werner-Sinn.

ECB to Launch Stronger Stimulus = Pressure the Euro

Western Union's Joe Manimbo comments that the data was more evidence of the German economy’s continued slowdown:

“Evidence of weakening prospects for the mighty German economy weighed on the single currency, knocking it to three-week and three-year lows against the dollar and yen, respectively.

“Germany’s all-important Ifo survey fell to 105.7 in February, a full point south of forecast, and the weakest since December 2014.

“The data depicted a weakening outlook for Germany, increasing calls for the ECB to launch stronger stimulus next month.”

Good Call by Helaba

Helaba Economics successfully predicted the soft IFO data, saying in a note this morning before the release that sentiment data overall had been trading lower, so IFO would probably follow suit:

“There is still a certain degree of economic scepticism amongst market participants.

“The sentiment indicators published for February so far have largely shown weaker results.

“The preliminary estimate of the purchasing managers' indices for the manufacturing sector is particularly worth noting, as it fell from 52.3 points to 50.2.

“The indications from the ZEW and Sentix components are also negative.

“Above all, the fact that both the economic expectations and the current situation assessments have softened suggests caution for today's Ifo business climate index.”