EUR/USD: Trading the German IFO Expectation Report

Business confidence in Germany slipped to its lowest level since 1982, while firms raised their outlook for future growth as policymakers continued to take unprecedented steps to shore up the economy. The IFO business climate index fell to 82.1 from 82.6 in February, while a measure of expectations increased to 81.6 from 80.9, and the extraordinary efforts taken on by policymakers may continue to reinforce an improved outlook for future growth as the European Central Bank is anticipated to cut borrowing costs further in the month ahead. The ECB continued to hold a dovish tone following the policy meeting in March, stating that the interest rate could fall further from the record low of 1.50% as the downturn in the global economy intensifies, and may adopt tools beyond the interest rate as the outlook for growth and inflation remains bleak.

The German IFO business confidence index unexpectedly fell to a 26-year low of 82.6 in February, while the gauge measuring future expectations increased to 80.9 from a revised reading of 79.5 in January as policymakers took unprecedented steps to soften the landing of Europe’s largest economy. After holding the benchmark interest steady this month, the European Central Bank is widely expected to lower the key lending rate by 50bp further in March as the International Monetary Fund expects the region to face its worst economic downturn in over  half a century, and policymakers may take further steps to shore up the ailing economy as growth and inflation falter. Nevertheless, as ECB President Trichet remains reluctant to overshoot the interest rate, market participants have argued that the Governing Council has done too little, too late, and conditions are likely to get worse as trade conditions falter.