EUR/USD consolidates ahead of the Fed and other key events

• EUR/USD holds in familiar territory ahead of the showdown event this week in the Fed.
• IFO German business sentiment is at its lowest in more than two years.

At 1.0223, EUR/USD is sideways at the start of the week ahead of the Federal Reserve interest rate decision on Wednesday. The US dollar, however, has been on the back foot for the main while traders weigh the implications of a rate hike and second guess what this will mean for the US economy that, according to recent data, could be on the cusp of a recession.

As recent as last Friday, data showed that the US Composite PMI Output Index fell far more than expected to 47.5 this month from a final reading of 52.3 in June. This is showing that the world's largest economic power could be headed for a recession. However, the greenback found some support from safe-haven flows late on Friday while investors' stepped aside from stocks on the back of some weak earnings reports. Meanwhile, to start the week, pre-Fed jitters are keeping the greenback off its highs.

The Fed is widely expected to raise interest rates by 75 basis points, but the worries are that a rate hike will close out pandemic-era support for the economy and with claims for jobless benefits rising to their highest in eight months, investors are treading cautiously in the build-up to the event. The Fed decision will be accompanied by the latest growth figures later in the week as well as the Fed's preferred inflation measure.

Meanwhile, the recent 50 basis point rate hike by the European Central Bank lifted the euro vs the greenback at the same time equities on Wall Street were on the front foot during solid earnings. However, the effect was shortened on the back of the latest earnings that were not so encouraging. Investors are eyeing the earnings season for signs of a worsening economy as well as the impact of a strong greenback on profits. Nevertheless, Martins Kazaks, who is the Latvian central bank governor who was speaking with Bloomberg News said that the ECB may not be done with big rate hikes, and this has dented the greenback today while US equities were modestly lower to start the week. 

In domestic data on Monday, the IFO business sentiment survey showed on Monday that business morale in Germany has sunk more than expected in July to its lowest in more than two years. ''The collapse in the Ifo business climate (88.6 after 92.2) primarily reflects German companies' fear of a gas crisis,'' Commerzbank analysts said. ''Sooner or later, Putin might reduce gas deliveries again to make voters and politicians nervous so that they do not continue to support Ukraine militarily. Like the purchasing managers' index, the Ifo business climate now clearly points to a downturn in the German economy. How bad things end up is, unfortunately, primarily in Putin's hands.''