Business Conditions Worsen: We start the week with another set of weak data points for Germany, which worked to pressure the EUR/USD. The Ifo Business Climate Index fell again in October, continuing a downward trend since April when the index came in at 111.2. For October, it came in at 103.2, after a print of 104.7 in September. Forecasts averaged a call of 104.6.
(source: official release)
Continuing Decline: We can see that assessments of current business situation and business expectations for the future (6-months out) worsened. This adds to the string of poor data for Germany and for the Eurozone. There are concerns of recession and the ECB will continue to be pressured in considering QE. This prospect should pressure the euro. The EUR/USD for example, looks vulnerable in the 1H chart as it forms a flag pattern.
EUR/USD Reaction: After finding support at 1.2613 last week, price extended slightly to 1.2714 to start the week but stuck around 1.27 during the release of Germany’s business climate data. The 1H chart shows the pair forming a flag pattern against last week’s downswing.
(click to enlarge)
Breakout Scenario: If price falls back below 1.2660, it would have cleared below the flag pattern and a support/resistance pivot. This would signal bearish continuation, at least in the near-term toward 1.2613, with risk towards the 1.26 handle.
Limited Upside Risk: Now, if price holds above 1.2660, the near-term consolidation might not be over. But even if price continues higher above 1.2715, we should limit the bullish outlook against a downtrend that is intact as seen in the daily chart below. We should then watch for sellers in the 1.2740-1.2750 level.
Bearish Continuation: A bearish breakout in the 1H chart would also have bearish indications for the daily chart as well. We can see that price action last week was already signaling bearish continuation with a break below the October consolidation pattern. Therefore, there will be downside risk at least toward the 2014-low made in October, at 1.25.
(click to enlarge)
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