The Euro is trading lower against the dollar before a report economists said will show German business confidence fell to the worst in a year, adding to signs Europe will struggle to contain its debt crisis.

The Ifo institute in Munich will probably say its business climate index, based on a survey of 7,000 executives, declined to 111 in August from 112.9 in July, economists predicted in a Bloomberg News survey.

Since the EU summit on July 21, EUR/USD held within a remarkably tight sideways trading range. The outcome of the meeting was unable to prevent further contagion on the EMU government bond markets. On the contrary, Italy came in the fire line, too.

In theory, this should have been a negative factor for the euro. However, markets still saw a balance of weakness between the euro and the dollar as the news flow from the US was also far from inspiring. Recent eco data indicated that the US might be at the brink of a double dip recession and the outcome of the US budget debate illustrated that US policymakers have no comprehensive plan to address the debt situation. S&P downgrading the US AAA-credit rating reinforced this feeling and weighted on the dollar.

The Fed committing to extend an extremely accommodative policy at least until 2013 was also no help for the US currency. Since the 21 July EU Summit, EUR/USD hovered sideways in a narrow range roughly between 1.4050 and 1.4500. Trading in the EUR/USD cross rate for a big part decoupled from the high level of volatility in most other markets. A series of high profile resistance levels is lining up (previous highs at 1.4537, 1.4578 and at 1.4697). A sustained break above this area would open the way for a retest of the year high at 1.4940. For such a break, quite a high profile trigger is probably necessary and for now, we don't see such a trigger. So, some tactical profit taking on EUR/USD longs can be considered in case of a test of the topside of this sideways trading pattern (e.g. high 1.45 area).

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Strategy: buying positions @ 1.439 with 1.445 & 1.4515 in sight.

Downside: The downside penetration of 1.438 will call for 1.4345 & 1.4295.
Despite yesterday's retreat from 1.4500, as the single currency has continued to find support around the Ichimoku cloud top, suggesting consolidation with upside bias would be seen but break of said resistance is needed to signal upmove has resumed for a retest of 1.4517 and later towards 1.4537. Having said that, only a sustained breach of 1.4537 would suggest a possible upside break of medium term broad range, bring test of previous resistance at 1.4580 formed last month.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.