Home Forex Analysis And Forecasts What to watch: Attention on Germany as recession speculation mounts

What to watch: Attention on Germany as recession speculation mounts

The week following the US employment report is supposed to be one of the quieter ones for the currency markets. However that was not the case last week with a variety of different stories catching attention. This included a global economic downgrade from the International Monetary Fund (IMF) inspiring a fire sale in stocks, anxiety over a dovish FOMC Minutes release encouraging widespread Greenback profit taking alongside a decline in Chinese economic forecasts from The World Bank resulting in a rebound in Silver demand. One story that also emerged but did not gain the usual attention is that there is increased anxiety that Germany might be heading for a recession.

Over the Summer months, an unexpected decline in German economic releases alarmed spectators but, truth be told, the data we received over the Summer has been nothing but a small sneeze compared to what we have experienced so far this Autumn. Serious fears have now emerged that Germany could be heading for a recession following a collection of poor data that quashed hopes Europe’s largest economy could return to consistency. Not only have recent German ZEW and IFO forecasts showcased a decline in business confidence levels, but there has been a deterioration in German Import/Exports, an unexpected manufacturing contraction alongside the largest German Factory Orders decline in five years.

Germany will remain in the spotlight this week with two high risk economic releases in the upcoming days. On Tuesday morning, Germany’s ZEW Survey for October is announced where economists will be hoping to see an increase in German business confidence levels. We should also pay close attention to Wednesday’s German inflation data. Reason being is that there has been such an unexpected downturn in German economic performances, there must be a downside risk that German prices might not have increased to the 0.8% expectation in September. If this occurs, investors will likely begin pricing in future action from the ECB.

If EU currency weakness is to continue, a reversal of the remaining gains from the ECB leaving policy unchanged in October is likely. In regards to the EURUSD, potential support can be found at 1.2585 and the current yearly low, 1.2499. The divergence between the EU and UK economy remains strong and I have been surprised by the EURGBP pair making an unexpected run towards 0.79 in recent days. If the pair declines, support can be found at 0.7851 and 0.7811.

The EURNZD has also participated in an upside rally over recent weeks, but I remain suspicions that the Reserve Bank of New Zealand (RBNZ) might raise rates one more time before the year concludes. If the EURNZD was to pullback, support is located at 1.6062 and 1.6003.

The EURJPY recorded a fresh 2014 low this morning (135.543) but further downside moves could find support at 135.

Overall, although we may not receive concrete economic data from Germany this week which will provide clarity regarding whether the “backbone” to the EU economy is heading for a recession, we can’t rule out the bearish implications a German recession would have on the Euro.

Investors are continually pricing in the prospect of further action from the ECB, but a German recession is completely unexpected and would inspire rapid Euro selling. Mario Draghi warned us back in August “that the fundamentals for a weaker exchange rate are better now than they were” and looking at the Eurodollar decline from 1.32 to as low as 1.24 in the past two months, he has been validated. There is also no more efficient way to ensure a weaker EU currency than for German economic performances to disappoint.

Published On Mon, Oct 13 2014, 11:23 GMT

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