Research Team at Scotiabank, suggests that the recent soft German IFO survey was the latest disappointing data print from the Eurozone; weaker data contrasts with an upturn in US data prints relative to market expectations and tilts the balance of risks towards more ECB stimulus at March’s policy meeting. Key Quotes “EURUSD’s recent resiliency has ignored a strong seasonal bias towards EUR weakness through Q1 and our own assessment of fundamental fair value but this divergence may be explained by risk aversion. Slower Chinese growth (China is an important market for German exports) or broader uncertainties may be weighing on sentiment but the bottom line is that Euro-zone data have consistently disappointed so far this year and the Eurozone’s largest (and strongest) economy risks seeing growth slow somewhat in early 2016 at least. German Q4 GDP was confirmed at +0.3% q/q today; the IFO readings suggest some downside risks to Q1 growth at least. Slow Eurozone growth, low inflation (and inflation expectations) and the relatively strong EUR all tilt the balance of risks towards additional ECB stimulus at the March ECB meeting. While Eurozone data have consistently disappointed since January, US data releases have tended to surprise relatively more positively since the start of February. Even if the Fed remains on hold next month, the backdrop suggests a revival of the asymmetric growth and diverging monetary policy narrative which may bring the EUR back in line with seasonal trends and fundamental fair value. The EUR’s status as a funding currency has perhaps helped mitigate negative fundamental and seasonal pressures on the exchange rate in the past few weeks. Heightened risk aversion, as global stocks declined through December and January, coincided with a sustained deviation in EURUSD spot from our fundamental fair value estimate, suggesting a fairly significant risk premium has been built into the EUR’s performance recently. Spot is currently two standard deviations above our estimated equilibrium. Risk appetite may have to stabilize before EURUSD can fall towards levels we consider more fundamentally appropriate. We continue to target EURUSD at 1.05 at end Q1 and 0.95 for H2 this year. Technically, we expect strong resistance now in the 1.1045/75 area and for EURUSD weakness to accelerate on a break under 1.0980 support.” For more information, read our latest forex news.