Euro slides amid worrying drop in German business morale

The euro remained under pressure on Tuesday, amid growing concern over Germany’s economic outlook.

Meanwhile, the pound is trading in a narrow range so far this morning, with GBP/EUR subdued at €1.1648 and GBP/USD flat at $1.2886. GBP/CAD is stable at CA$1.7006, while GBP/AUD climbs to AU$1.9049 and GBP/NZD holds steady at NZ$2.0724.

Coming up, will the Federal Reserve’s latest interest rate decision inject volatility into the US dollar later this evening?

What’s been happening?

The euro stumbled through yesterday’s trading session in response to Germany’s latest IFO business climate index.

Germany’s most prominent leading indicator fell more than expected in July, with business morale suffering its third consecutive decline and slumping to its worst levels since November.

The euro then came under additional pressure after the International Monetary Fund’s (IMF) latest forecasts predicted Germany’s economy will shrink by 0.3% in 2023.

The US dollar also faced headwinds on Tuesday, with a broadly risk-positive mood limiting demand for the safe-haven currency.

Meanwhile, the pound traded with modest gains yesterday, as it was supported by the improving market mood and rebound in UK business optimism.

What’s coming up?

Centre stage today will undoubtedly be the Federal Reserve’s latest interest rate decision.

The market consensus is for another 25bps hike from the Fed this month. But with the increase largely priced in, any subsequent movement in the US dollar is likely to be driven by the bank’s outlook on policy.

If the Fed drops any hints that its current hiking cycle has run its course, the US dollar is likely to plunge.

Conversely if the bank strikes a more hawkish tone than markets expect, USD exchange rates may jump.

Meanwhile, movement in the euro may prove limited today, with EUR investors reluctant to make any aggressive bets ahead of the European Central Bank’s (ECB) own interest rate decision tomorrow.

The pound may also struggle to find momentum today, with the absence of any notable UK data releases likely to leave the currency without any strong directional bias.