EURUSD: German Business Sentiment Expected to Falter - Can the Euro Hold Its Ground?

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Trading the News: German IFO – Business Climate

What’s Expected

Time of release: 10/27/2008 09:00 GMT, 05:00 EST

Primary Pair Impact : EURUSD

Expected: 91.0

Previous: 92.9

Effect the German IFO – Business Climate Survey had over EURUSD for the past 3 months

September 2008 German IFO – Business Climate Survey

The German IFO business confidence survey slipped to a three year low of 92.9 from 94.8 in August as Europe’s largest economy teeters on the brink of a recession. Fading demands from around the globe paired with the downturn in the domestic economy has certainly taken a toll on German businesses, and conditions may only get worse as rampant inflation continues to sap purchasing power. Mounting price pressures paired with slowing growth could leave the ECB on the sidelines as they continue to abide by their one and only mandate to ensure price stability, but increased concerns of a recession could push the central bank to lower the benchmark interest before the end of the year.

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August 2008 German IFO – Business Climate Survey

German business confidence fell to a three year low of 94.8 from 97.5 in July, fueling recessionary concerns for Europe’s largest economy. Meanwhile, business expectations slipped to a 15 year low of 87.0, which suggests that conditions may only get worse as firms face rising input costs amid fading demands. Economic activity contracted in the second quarter for the first time in almost four years, and may remain subdued for the rest of the year as upward price pressures continues to sap purchasing power. Record high inflation has led the ECB to hold a hawkish bias going forward, but the central bank could be forced to push inflationary concerns to the backburner as Germany is on the brink of a recession.

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July 2008 German IFO – Business Climate Survey

Business confidence in Germany slipped to a three year low of 97.5 as firms continue to face higher input costs amid slowing demands. The growth outlook for Europe’s largest economy however, is beginning to look bleak as the manufacturing PMI fell more than expected to 50.9 from 52.6 in July. Industrial production also fell more than expected in May as the index slid to 0.8% from 5.0%. The highest inflation in 16 years pushed the ECB to hike the benchmark interest rate to 4.25% on July 3rd, and may limit economic activity even further. Bearish sentiment and price action would have triggered a short trade, but lack of follow through would leave us with 25 points in profit.

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How To Trade This Event Risk

The German IFO business confidence survey is expected to fall to 91.0 from 92.9 in September as Europe’s largest economy teeters on the brink of a recession. In fact, the economy contracted 0.5% in the second quarter as mounting prices pressures paired with slowing demands pushed firms to cutback on investments. Meanwhile, producer price inflation unexpected increased 0.3% in September to raise the annual rate to 8.3% from 8.1%, indicating that conditions may only get worse as firms continue to deal with higher costs. In addition, the trade surplus narrowed for the second consecutive month in August to 10.6B from a revised reading of 13.8B as exports fell 0.5% after plunging 1.7% in July. Furthermore, manufacturing activity in Germany contracted for the third straight month as the advanced PMI reading plunged to 43.3 from a final reading of 47.4 in September, while the breakdown of the report showed that new orders dropped to its lowest level since recordkeeping began in 1996. Moreover, economic activity in the service sector stalled for the first time since January as the PMI index slipped to 49.7 from 50.2. The dour outlook for Germany has raised expectations for the European Central Bank to remain focused on growth, and may lead the central bank to lower the benchmark interest rate further before the year comes to a close. Credit Suisse overnight index swaps are showing that market participants are expecting the ECB to cut at least 100bp over the next 12 months, which could drag on the euro in the near-term.

Despite the downturn in the economy, falling oil prices paired with lower borrowing costs may help firms to raise their outlook, and a rebound in business sentiment would certainly help to spur bullish sentiment for the euro. Therefore, an improved reading would favor a long EURUSD trade, and we will look for a green, five-minute candle following the release to confirm and entry on two lots of the euro-dollar. We will place our initial stop at the nearby swing low (or reasonable distance), and this level of risk will determine the target for the first lot. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

However, fading demands paired with recessionary concerns may continue to weigh on businesses, and may drive firms to hold a dour outlook going forward. As a result, a fall in business confidence would favor a short trade for the EURUSD, and we will follow the same setup as long trade mention above, just in reverse.

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EURUSD: German Business Sentiment Expected to Falter - Can the Euro Hold Its Ground?

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