Recent Eurozone economic data, including Germany’s IFO business climate index, the Purchasing Managers’ Index (PMI), and the ZEW index, indicate improving activity across the region, according to Brown Brothers Harriman’s (BBH) Elias Haddad [1]. Specifically, Germany’s IFO business climate index rose to 86.6 in July from 85.7 in June, with the improvement entirely driven by expectations [1]. This positive momentum is echoed by increases in the Eurozone July PMI and ZEW index [1].
Despite inflation remaining above the European Central Bank’s (ECB) target, the data reinforce the case for the ECB to resume raising interest rates in September [1]. However, Haddad notes that the market has already priced in a 90% probability of a 25 basis point rate hike at the ECB’s September 10 meeting, as reflected in the swaps curve [1]. As a result, the potential for further Euro appreciation is seen as limited, with nearby technical resistance at 1.1483 (the July 15 high) and support at 1.1335 (the June 24 low) for EUR/USD [1].
BBH’s analysis suggests that while the recovery signals are positive, the already-anticipated policy tightening and technical barriers may cap the Euro’s upside in the near term [1].
CONCLUSION
Eurozone economic indicators are improving and support expectations for an ECB rate hike in September, but the market has largely priced in this move. As a result, analysts see limited further upside for the Euro against the US Dollar in the short term.