German Ifo Business Climate: How To Read The Outcomes

Written by Nour Eldeen Al-Hammoury

After a slow start of the week across the board on Monday, Tuesday comes with very few economic releases from Europe and the US, yet it’s likely to have a medium impact on the markets ahead of key events later this week. In today’s article, we will explain the importance of the German IFO Business Climate, how to read the outcomes and how to use it in your trading.

Definitions

• Ifo Business Climate: Level of a composite index based on surveyed manufacturers, builders, wholesalers, and retailers. This survey is highly respected due to its large sample size and historical correlation with German and wider Eurozone economic conditions. It tends to create a hefty market impact upon release. Source changed series from a base year of 2000 to a base year of 2005 as of May 2011.

• Ifo Current Assessment: The IFO Current Assessment released by the CESifo Group is closely watched as an indicator of current conditions and business expectations in Germany. The Institute surveys more than 7,000 enterprises on their assessment of the business situation and their short-term planning. The positive economic growth anticipates bullish movements for the EUR, while a low reading is seen as negative (or bearish).

• Ifo Expectations: The IFO Expectations released by the CESifo Group is closely watched as an early indicator of current conditions and business expectations for the next six months, where firms rate the future outlook as better, same, or worse. An optimistic view of those 7,000 business leaders and senior managers is considered as positive, or bullish for the EUR, whereas a pessimistic view is considered as negative, or bearish.

Why This Is Important

It’s a leading indicator of economic health – businesses react quickly to market conditions, and changes in their sentiment can be an early signal of future economic activity such as spending, hiring, and investment. Such figures are monitored by the European Central Bank and most of the time it had a notable impact on the markets, as the outcome increase or decrease the possibility of an action by the ECB, depending on how better or worse the data are.

Market Impact

Generally speaking and as stated above, a positive outcome is considered as positive for the Euro pairs, while equities might fall back. However, traders need to read the full three figures and not only the Business Climate Index. Most of the websites provide only one figure which is the Business Climate, while the market will always concentrate on the Current Conditions and the Future Expectations.

Today’s Forecast

EURUSD Outlook

The Euro has been declining since the ECB decision, especially after the ECB chairman confusing remarks about tapering and extending QE, giving the market no clues about December decisions. On the daily chart, the Euro has formed a head and shoulders formation, which seen as a bearish signal over the coming hours. However, the technical indicators are heavily oversold, which suggests that the downside move might not last for long. Yet, the key support remains at 1.0825, which should be watched closely, as a break below that support, would clear the way for further declines back to last year’s lows. Otherwise, buyers should appear around that area.

Levels To Watch