Forex Market: EUR/USD extends daily losses following a drop in German economic sentiment

The euro extended daily losses against the US dollar on Tuesday, after data showed the business confidence in the largest euro zone economy, Germany, fell for the first time in five months, curbing demand for the 18-nation common currency.

EUR/USD touched a session low at 1.3808 at 09:40 GMT, after which consolidation followed at 1.3812, losing 0.2% for the day. Support was likely to be found at March 24th low, 1.3760, while resistance was to be met at March 24th high, 1.3876.

The index of business climate in Germany dropped to 110.7 this month from 111.3 in February, the strongest since July 2011, the German research institute, Ifo reported today. Analysts predicted a smaller decline to 110.9. The index is based on a survey, encompassing almost 7 000 companies operating in manufacturing, construction, retail and wholesale trade.

The IFO gauge of business climate represents an average of the index of expectations and the index of current assessment. Both indexes are equally-weighted. Values above 100.0 are indicative of a greater number of positive forecasts. The more readings distance from this key level, the stronger the confidence of the entities surveyed is.

The IFO gauge of expectations, reflecting economic expectations of German companies during the upcoming six months, slowed down to 106.4 in March from 108.3 in the preceding month, missing analysts projections for a reading of 107.6.

However, the IFO gauge of current assessment for Germany, reflecting economic conditions at present, improved to a one-year high of 115.2 in March from 114.4 in February, exceeding expectations for an increase to 114.5.

Meanwhile, a report by the US Commerce Department may show today that sales of new homes in the US dropped 4.9% in February, reaching an annualized 445 000 pace, according to the median estimate of experts. A separate report by the US Federal Housing Finance Agency may reveal its house price index rose 0.6% in January, following a 0.8% increase in the prior month. Higher-than-expected readings will certainly heighten the greenbacks appeal.

Demand for the US dollar remained supported after Federal Reserve policy makers trimmed their bond-buying program by another $10 billion to $55 billion per month, last week. Moreover, Federal Reserve Chair Janet Yellen, said that the first increase in borrowing costs should come “around six months” after the end of the stimulus program. The monetary easing program, which tends to devalue the US dollar, is expected to be brought to an end this fall.

The Federal Open Market Committee also revised its forecasts, showing more policy makers predicted the main interest rate, now close to zero, would increase at least to 1% by the end of next year and 2.25% by the end of 2016, higher than previously forecast. The Committee also dropped the unemployment rate threshold for considering when to raise interest rates, making a transition to a wider set of data.

“The biggest focus is whether the U.S. economy will improve to justify the Fed’s outlook,” Shinichiro Kadota, a foreign-exchange strategist at Barclays Plc in Tokyo, cited by Bloomberg. “We expect U.S. data to strengthen and the dollar to rise gradually, especially around the second half of this year.”

Elsewhere, EUR/GBP touched a session high at 0.8394 at 07:05 GMT, after which the pair trimmed losses to trade little changed at 0.8389 at 08:49 GMT, adding 0.01% for the day. Support was likely to be found at March 24th low, 0.8344, while resistance was to be met at March 18th high, 0.8400, also the pair’s strongest since December 18th.