HomeGerman IFO Business Climate Index Beats Expectations, Euro Surges

German IFO Business Climate Index Beats Expectations, Euro Surges

The IFO business climate index reaches its highest value since May 2019. The German economy is picking up speed, and managers are optimistic for the period ahead.

One of the most important economic reports out of Europe is the German IFO Business Climate. This is a survey of German managers that presents an economic forecast for the next six months. Because of the relatively large number of companies surveyed (over 9,000), the report usually has a strong impact on the currency market, in particular on the euro pairs.

As was the case this week. The report showed that the business climate in Germany increased to its highest level since May 2019. Moreover, the German economy is picking up speed, and optimism prevails. Therefore, the euro pairs rose on the announcement, with the EUR/USD leading the way, up from 1.2220 before the release yesterday, to 1.2260 a few hours later. Other euro pairs also benefited from the better than expected data, such as the EUR/JPY or the EUR/GBP.

Business Climate Index for the Services Sector Back to Pre-Pandemic Levels

The IFO survey is highly respected among traders. This is one of the few forward-looking reports on the German economy and provides a clear picture of the challenges and opportunities ahead. It is a leading indicator of economic health, offering an educated guess about the German companies’ prospects regarding future investments, hiring or spending.

The manufacturing sector did not contract that much during the pandemic, but the services one took a large hit as people were forced to stay indoors due to lockdowns.

In April, the big surprise came from the services sector, with the index climbing to the highest level since February 2020. Moreover, the construction climate looks promising ahead. Business expectations and the assessment of the business situation, improved sharply.

All in all, the IFO report provided an optimistic picture of the German economy, further fueling the recent strength seen in the euro pairs. The EUR/USD is up from 1.17 to over 1.22 in the last couple of months, a rally confirmed by the EUR/JPY cross too.

The positive data puts pressure on the ECB to taper the asset purchases. Will it be the first central bank in the G10 countries to do so?

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