German business climate tops forecasts as Euro tests 0.8400 against British Pound

• Germany’s IFO Business Climate Index climbs to a three-year high in October, lifting the Euro modestly across the board.
• Stronger economic expectations have outweighed a weaker assessment of current conditions.
• Having recovered its earlier losses, EUR/GBP is trading at session highs around 0.8400.

A stronger-than-forecast German IFO Business Climate report has helped the Euro (EUR) build on its gains against the British Pound on Monday. At the time of writing, EUR/GBP is testing 0.8400 after reversing an earlier retreat. The pair has recovered 0.3% from the year-to-date lows near 0.8360 reached earlier on Friday.

October’s German business sentiment reading rose to 90.2 from September’s 89.9, marking its highest level in more than three years. Markets had instead forecast a decline to 89.8. Although the current conditions component slipped to 88.8 from 89.5 a month earlier, the expectations measure more than offset that weakness, advancing to 91.6 from 90.4 in September.

Euro gains support as Oil prices and French yields fall

A modest pullback in Oil prices is also supporting the Euro. On Monday, Brent Oil fell below $110.00 a barrel, down 2% from Friday’s highs, following reports that Qatari mediators had arrived in Tehran on Sunday to pursue another initiative aimed at easing tensions between the US and Iran.

Meanwhile, Moody’s left France’s debt rating at Aa3, despite the country’s rapidly expanding debt and social unrest that prompted large protests across most major cities over the weekend. Investors had expected a downgrade and welcomed the rating agency’s decision. France’s 10-year government bond yields subsequently dropped below 5%, before giving back some of that decline during Monday’s European session.

With monetary policy decisions due from the European Central Bank (ECB) and other major central banks this week, investors are likely to remain on the sidelines. The Bank of England (BoE) follows next week, with markets preparing for a quarter-point rate increase. That prospect is highly likely to limit any falls in the Pound this week.