EUR/USD erases gains as risks of EU double-dip recession rise

Written by: Crispus Nyaga
January 25, 2021
  • The EUR/USD declined today after the broad weakness of German sentiment data.
  • According to ifo, the business climate and current assesment dropped in January.
  • The data came two days after the relatively weak flash manufacturing and services PMI data.

The EUR/USD pared earlier gains after weaker German sentiment data sent more signals of a double-dip recession in the European Union. The pair dropped to an intraday low of 1.2144.

EUR/USD erased earlier gains

German business sentiment worsened

After months of improvements, the sentiment among business managers in Germany deteriorated in December as the coronavirus cases continued to rise. According to the ifo Institute, the Business Climate Index declined from 92.2 in December to 90.1 in January as the government announced a new lockdown. This figure was below the estimated 91.8. 

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In the same period, the current assessment declined from 91.3 to 89.2, lower than the estimated 90.6. Similarly, the business expectations rose from 93.0 to 91.1.

These numbers are important because they have a broad effect on the overall economy. For example, highly-confident companies tend to buy more products and employ more people. When confidence is low, they fear about the future and slash their research and development (R&D) and other capital utilisation. 

US data ahead

The EUR/USD pair also dropped as global risks rose after reports said that the Biden administration would ban flights from more than 20 countries. Some of the countries likely to be affected are the United Kingdom, Ireland, and South Africa. 

Meanwhile, forex investors are watching for the upcoming Fed interest rate decision and economic data from the United States. In general, they expect the Fed to leave interest rates and its quantitative easing policies unchanged. 

On Thursday, the statistics bureau will publish the US GDP numbers. Economists believe that the economy expanded in the fourth quarter because of the robust Christmas shopping. On Friday, the bureau will publish the personal spending and income numbers.

EUR/USD technical outlook

EUR/USD technical chart

The four-hour chart shows that the EUR/USD pair dropped to a year-to-date low of 1.2056. In the past few days, the pair has formed an ascending channel that is shown in blue. And today, it dropped to the lower side of this channel. The price is also on the same level as the 25-day exponential moving average.

Therefore, in my view, I suspect that the pair will break-out lower ahead of the Fed decision. That’s because the ascending channel resembles a bearish flag pattern. If this happens, the pair will likely retest the YTD low of 1.2056.