As Germany grapples with economic challenges, economists at ING turn their attention to the EUR/USD outlook, particularly in anticipation of the German IFO sentiment survey. The recent decline in German manufacturing PMIs to 42.3 in February, coupled with a modest uptick in the service sector, sets the stage for a closely watched IFO survey.
With expectations of a soft reading in the IFO survey, FX analysts are deliberating whether the Euro has fully incorporated the impact of Germany’s economic struggles, or if other mitigating factors are at play. ING suggests that the former scenario is more plausible, contingent on an additional key consideration. The FX market, driven by global risk dynamics and short-term rate differentials, hinges on whether the mounting evidence of German economic weakness aligns with the prospects of accelerated and early rate cuts by the ECB.
Addressing this concern, President Lagarde and her colleagues emphasize that evidence of economic weakness in Germany doesn’t necessarily correlate with a prompt response in terms of rate cuts. In this context, the relative resilience of the Euro should not be surprising, and the risks associated with a short-term decline in EUR/USD are primarily linked to the potential upside for the USD.
As ING analysts delve into the intricacies of inflation, particularly wages, they highlight the focal points that continue to shape the Euro’s trajectory in the current economic landscape. While acknowledging the challenges faced by Germany, the broader global risk context and short-term rate differentials remain pivotal factors influencing the EUR/USD dynamic.
