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Euro Drops on Weak IFO but Currency Pair is Oversold

David Becker
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Euro Drops on Weak IFO but Currency Pair is Oversold

EUR/USD dropped to a three-month low following a weak Ifo survey. The low so far has been 1.3616, and, notably, the 200-day moving average has been breached for the first time since last September. The next obvious target is the February 2013 low at 1.3584. The euro has weakened across-the-board, EURGBP to a 17-month low, and EURJPY to a two-day low, bringing Wednesday’s three-month low back into scope. Yields in German nosedived, putting the yield differential solidly in favor of the greenback.

The German Ifo dropped sharply in May. The German May Ifo index came in weaker than expected at 110.4, down from 111.2 in the previous month. The current conditions indicator dropped to 114.8 from 115.3 and the future expectations index fell back to 106.2 from 107.3. This was the weakest expectations reading since October last year. The diffusion index, which gives the balance of positive and negative answers, fell to 13.2 from 14.8.

This still indicates that optimists outnumber pessimists, but readings were down across the board. Data ties in with the weak ZEW and the mixed PMI readings for Germany, but also with expectations for a marked slowdown in Q2 GDP from the strong first quarter. The German economy is still doing well and heading for very robust growth this year, but the setback in confidence serves as a reminder that downside risks remain, even in Germany.

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The EURUSD sliced through trend line resistance, which connected the lows in November to the lows in February and comes in near 1.3670. Resistance is now seen at that lever which was former support. Momentum on the currency pair is negative as the MACD (moving average convergence divergence) index prints in negative territory with a downward sloping trajectory. The RSI is moving lower with price action reflecting accelerating negative momentum. The current reading of 29, is below the oversold trigger level of 30 and could foreshadow a correction in the currency pair.

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