News & analysis

EURUSD volatility has been low in recent week’s but the pair has been trending downwards steadily this month as data flow has remained soft.

This morning’s German GDP beat may offer some support in the short term. The Eurozone’s largest economy was widely expected to have entered a technical recession in Q3, but stronger consumption and government expenditure offset a sharp downturn in the export-orientated manufacturing sector.

The 0.1% QoQ reading hasn’t prompted a substantial bout of euro strength, however. This is due to growth levels still remaining weak in the Eurozone, and specifically Germany, under a cloud of trade uncertainty and slowing global growth.

Along with this, the reading suggests that German officials may continue to drag their feet in loosening the fiscal purse strings in the coming year. German officials previously stated that the balanced budget rule may be revised if Germany’s economy showed a significant downturn.

By avoiding a technical recession, albeit by the slimmest of margins, the prospect of more fiscal stimulus in the Eurozone has constrained any euro rally this morning.

The news may come as bad news for the European Central Bank. Both the incumbent ECB president Christine Lagarde and her predecessor Mario Draghi have hit out at austerity measures across the Eurozone amid deteriorating economic data, with Lagarde recently stating that German and Dutch governments need to use their budget surpluses for investment.

While a minor beat in growth eases fears of an entrenched economic slowdown in the Eurozone, by reducing the chances of increased fiscal stimulus in Germany, today’s data release may have in effect revised down the longer-term trajectory of growth in the economic bloc.

Currency markets are fickle, and the euro’s gains this morning have been short lived.

The preliminary Q3 GDP reading for the whole of the Eurozone was released at 10:00 GMT today. A beat in expectations of that reading is only logical following Germany’s data this morning.

Graph: EURUSD over the last month

 

Author: Simon Harvey, FX Market Analyst at Monex Europe. 

 

 

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