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EUR/USD: IFO Pessimism and Geopolitical Uncertainty

Relevance up to 08:00 2022-03-26 UTC–4

The euro-dollar pair continues to trade in the 1.0960-1.1050 price range, the framework of which has been outlined during this week. And if on Thursday, the EUR/USD bears tested the lower limit of this range, today the bulls of the pair updated the local (two-day) high, reaching 1.1038. After the upward surge, traders traditionally retreated, settling in the middle of the echelon. Such price pullbacks are already in the order of things: the dollar reacts sensitively to the external information flow, strengthening or weakening its positions.

But if we look at the weekly chart, we will see that traders this week tried to develop a downward trend, but were forced to retreat, returning to previous price levels. In fact, the couple is marking time. Market participants do not dare to open large positions, either in favor of the dollar or against it. The euro, in turn, is moving in the wake of the U.S. currency, without having its own arguments for turning the situation around.

The focus is still on geopolitics, while macroeconomic reports have a background impact. They only complement the fundamental picture, but do not form it. However, today the reports from the IFO still helped the EUR/USD bears to extinguish the upward momentum for the pair. The published result disappointed market participants, especially against the background of quite good PMI reports that were published Thursday.

Note that all components of the PMI came out in the green zone, although they reflected a slight decrease relative to February. The vast majority of analysts expected a deeper decline – both in the service sector and in the manufacturing sector. In particular, the index of business activity in the German manufacturing sector in March came out at 57.6 points (in February it was at 58.4), while experts predicted a decline to 55 points. A similar trend was demonstrated by the pan-European index of business activity in the manufacturing sector (with the forecast of a decline to 55 points, it fell to 57).

However, today’s reports from the IFO were not so optimistic. On the contrary, the March figures reflected the pessimism of German entrepreneurs. Thus, the indicator of the business environment in Germany dropped sharply to 90.3 points. This is the weakest result since January last year. The index consistently showed positive dynamics over the previous three months, but in March it immediately collapsed by 8 points. Even in the wake of the coronavirus crisis, the indicator decreased at a smoother pace. In turn, the indicator of economic expectations from the IFO also dropped sharply by 13 points at once. All of the above indices were in the red zone.

Commenting on these figures, IFO economists noted that the German economy is going through “difficult and uncertain times.” First of all, supply chain problems have worsened, they said, with more than 80% of manufacturing companies now facing them. In February, this figure was at 70 percent.

The data from IFO aggravated the position of the euro, which, paired with the dollar, tried to get close to the upper boundary of the corridor, that is, to the level of 1.1050. However, the ongoing uncertainty around the negotiation process between Russia and Ukraine is putting pressure on the couple, albeit in the background. The information vacuum that has formed around the negotiations allows the safe dollar to stay afloat due to increased anti-risk sentiment. As a result, a kind of push-pull occurs on the pair, when neither side has a clear advantage. The pair is de facto marking time, trading in a busy echelon.

From a technical point of view, EUR/USD also demonstrates uncertainty. The daily candle is located on the D1 timeframe on the middle line of the Bollinger Bands indicator, as well as on the Tenkan-sen line. At the same time, the price is under the other lines of the Ichimoku indicator, including the Kumo cloud. The pair continues to trade within the 1.0960-1.1050 price range, which de facto formed this week. The locomotive of the price movement is the dollar, while the euro moves in the wake of the U.S. currency.

To talk about the development of the upward movement, EUR/USD buyers need to gain a foothold above the target of 1.1050 (the Tenkan-sen line on the daily chart). In this case, the next target will be 1.1100, the Kijun-sen line. For the development of the downward trend (which dominates on the higher timeframes now), sellers need to gain a foothold below 1.0960. This week, traders were unable to push through this level of support.

In general, in my opinion, the pair will trade in the corridor 1.0960-1.1050 in the medium term, impulsively reacting to the current information flow. As long as there is geopolitical uncertainty, traders will not wave the checker, opening large positions in favor of or against the greenback. Under such conditions, it is best to take a wait-and-see position or open trading orders from the borders of the above echelon – in the event that when approaching its borders, the impulse will gradually fade.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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