Germany, the largest economy in the Eurozone, will be releasing its IFO Business Survey for October. Stay tuned for that coming Monday at 0900 GMT. Surveys like this one provide very important information into Germany’s booming economic performance. As a result, it is a key ingredient of the overall stability and confidence in the Euro itself. Market analysts are predicting an increase in the IFO Business Climate Index of 0.7 points. They’re paying very close attention to how this data will impact the EUR/USD exchange rate, noting that the US dollar is becoming stronger.
The IFO Business Climate Index is forecast to increase to 87.8 this month from 87.7 in September. The Current Assessment sub-index is slated to fall 0.2 points, to 85.5 from 85.7 last month. This mixed picture gives a mixed bag outlook for the Euro. It is under constant challenge from external factors, particularly the day-to-day trajectory of US-China trade negotiations.
The Importance of Germany’s Economic Performance
Thus, Germany’s economic performance is tied at the hip with its government GDP, government employment and inflation targets. As the largest economy in the Eurozone, the health of Germany’s finances are crucial for investor confidence in the continued existence of the Euro. The German economy drives expansion outside its borders. It deepens its impact, as it serves as a lighthouse model for other Eurozone countries that are trying to stabilize their economies, or reverse-engineer their economic systems.
Germany has historically been at the forefront of propagating both a culture of and financial incentives for fiscal rectitude. The economic model provides for the deep importance of fiscal discipline and focus monetary policy. Virtually all Eurozone countries have adopted these features. This model establishes a strong precedent that will resonate throughout the region and influence future policymaking. It underscores Germany’s critical influence over the framing of budgetary policies and the implementation of fiscal policies.
The government’s bonds, or Bunds, are considered the bedrock of financial stability. For investors, long-term Bunds have been especially appealing. This appeal arises from their popularity due to strong support by the full faith and credit of the German Länder. Investors consider these bonds to be one of the best risk-free investments available. This conception serves to ensure that Germany remains a safe haven for capital in turbulent economic times.
Understanding Bund Yields and Their Implications
Bund Yields are instrumental in gaining insight into the overall investor sentiment regarding German government bonds. These yields are an indication of the annual return that investors can expect from holding Bunds to maturity. Importantly, Bund Yields move in the opposite direction to prices. As prices increase, yields decrease, and the other way around. This hard-to-determine relationship is critical for market participants as it shows how views of German debt are evolving in terms of risk.
As we near the release of the IFO Business Survey, market watchers are eagerly keeping an eye on Bund Yields. They are the most likely to be able to react to that data as it becomes available. A surprise in the other direction, a strong IFO survey, would be a good sign for business sentiment. This would likely cause investors to purchase Bunds, pushing yields lower when they expect a booming German economy. On the other hand, sometimes mixed or weak data means a bigger rise in yields as confidence fades.
The 14-day Relative Strength Index (RSI) has just dipped below the 50 level. This adds to the bearish bias for the EUR/USD pair. It could be that traders are betting on a weaker Euro relative to the US dollar. This trend may be further reinforced if outside forces continue to press down hard.
The EUR/USD Pair Faces External Challenges
Intra-day volatility on the EUR/USD exchange rate is likely to be high going into and immediately after the publication of the IFO Business Survey. Analysts have warned that easing trade tensions between the US and China as suggested in recent reports could further strengthen USD. As these negotiations continue, any good news for the US economy would be sure to grab investors’ attention. This major geopolitical shift would focus attention away from the Euro.
On the one hand, the expected mixed outcomes from the IFO survey may allow for a measured start of performance for the EUR/USD pair. When current assessments collide with business sentiment, it leads to confusion among traders. As a consequence, they often decide to take a wait-and-see stance. This situation illustrates the tension between a domestic economic “gold standard” and exogenous international events that can deeply affect the fundamentals driving currency.