Euro Rises, German Business Confidence Next

The euro has started the week in positive territory. In the North American session, EUR/USD is trading at 1.2220, up 0.32%.

Monday is a national holiday across much of Europe, and there are no economic releases out of the eurozone. Still, the euro is showing some strength and has punched into 1.22-territory.

German data will be in focus on Tuesday. The well-respected Ifo Business Confidence Index will be released for May (8:00 GMT). The index has accelerated over three straight months, and the upswing is expected to continue. The May consensus stands at 98.2, compared to the previous release of 96.8.

Despite the optimism in the business sector, the German economy is in trouble. In Q4, GDP contracted by 1.7% and an identical decline is expected for Q1 of 2o21 (6:00 GMT). Two consecutive declines would mean that technically the German economy is in recession. However, investors remain confident that Europe is turning the corner on the Covid-pandemic, so it’s unlikely that the GDP report will weigh on the euro, unless GDP is much weaker than the forecast.

The euro continues to trade at high levels and could head upwards, as expectations that the Fed might tighten monetary policy appear to be have been premature. Several Fed policymakers have urged the Fed to discuss tapering QE in the coming months, but the market appears to have internalized the Fed’s message that inflation is transitory and that the US economy is still in need of massive stimulus. At the same time, if US numbers continue to point upwards, in particular inflation and employment numbers, then we again see speculation about tapering and a higher US dollar. In the meantime, the US dollar remains under pressure.

EUR/USD Technical

• EUR/USD is testing resistance at 1.2242. Above, there is resistance at 1.2303
• On the downside, there is support at 1.2123, followed by 1.2065