EUR/USD made a strong bearish move last week after the FED raised interest rates by 75 basis points for the third time and they let the door open for further strong hikes in the next few meetings. That sent the USD higher and risk assets such as stock markets and commodity currencies lower.

This morning we saw another strong bearish move, as this pair fell from around 0.97 to 0.9560s. It has been retracing higher since then, but the 20 SMA is acting as resistance at the top and we just saw a bearish reversal just now. The business climate is deteriorating further in Europe as today’s Ifo report from Germany showed. So, the pressure will remain to the downside for this pair.

Ifo Business Climate – 26 September 2022

• Prior 88.5; revised to 88.6
• Expectations 75.2 vs 79.0 expected
• Prior 80.3; revised to 80.5
• Current conditions 94.5 vs 96.0 expected
• Prior 97.5

This is a stinker of a report and won’t do the euro much comfort as it just reaffirms a further deterioration in economic sentiment in Europe’s largest economy. As inflation continues to stay elevated, that is weighing on demand ahead of a rather bleak winter in which the energy crisis will take center stage. Sure, Germany has enough gas storage to stave off a catastrophe but a recession is already on the cards surely.

Remarks by Ifo Economist, Klaus Wohlrabe

• German economy is facing a recession
• Almost all economic sectors are in the minus
• Price expectations rose again, more than every second company set to increase prices
• Retail business expectations are at historic low
• Energy-intensive industries particularly pessimistic about winter

With inflation pressures keeping elevated and concerns surrounding the energy crisis not quite alleviated, the outlook for Europe’s largest economy looks rather grim ahead of the winter months. A recession looms large and the big question now looks more to be, how bad are things going to get?