Watch the reaction! When strong data fails to lift EUR/USD but the pair tumbles sharply at the first sign of weakness, it's a bad omen. After the business activity data, investors felt that Germany was regaining its status as the locomotive of eurozone growth. However, the drop in German business confidence, as measured by the Ifo index, after four months of gains, has turned things upside down.
German Business Confidence Dynamics
Rumors have started circulating in the market that companies had long hoped for fiscal stimulus from Friedrich Merz. However, as time passed, it became clear that much of the funding was going into consumption, ultimately aimed at patching budget holes. There are various options for implementing the proposed reforms, and some of them are unpopular with German businesses.
Germany's abandonment of fiscal restraint in favor of lavish spending laid the foundation for the EUR/USD uptrend. In its latest forecasts, ANZ points to the narrowing growth gap, arguing that German stimulus could boost eurozone GDP to 1.3% in 2025 and 1.6% in 2026, while the US economy is projected to slow from 1.8% to 1.7% over the same period. This divergence in GDP dynamics would support the euro rising to 1.20 by the end of this year.
But it turns out there are pitfalls along the way! Especially since geopolitical risks remain as high as ever. Donald Trump has stated that Ukraine can reclaim its lost territories, and the US will supply NATO with as much weaponry as needed. What the Alliance does with it afterwards is its own business.
Clearly, the armed conflict in Eastern Europe is far from over, and the Old World remains alone in facing it. The United States is washing its hands—at least until certain European countries stop buying oil products and gas from Russia, indirectly funding military action against themselves.
Market Expectations for the Federal Funds Rate
Thus, the euro's two main hopes—German fiscal stimulus and an end to the conflict in Ukraine—could both turn out to be lost illusions. No wonder that, against this backdrop, even an increased probability (up to 94%) of a Fed rate cut in October hasn't stopped EUR/USD bears from attacking. When the foundations are crumbling, the regional currency risks being buried under the rubble.
Technically, on the daily chart, a 1-2-3 reversal pattern may be forming and ready to activate. For this to happen, a confident break below support near fair value at 1.1725 is needed. Should that occur, the risk of a deep correction will increase. This would be grounds for selling the main currency pair. On the other hand, a bounce will allow the euro to consolidate in the 1.1725–1.1825 range.
