Date: 01 May 2018

As the euro zone’s economic powerhouse, what happens in Germany matters. From that perspective, given that private consumption has been a key driver of German economic growth in the last few years, the fact that Monday saw Germany’s Federal Statistics Office announce that German retail sales unexpectedly declined in March, the fourth monthly decline in succession, is worthy of note. Additionally, ECB Chief Mario Draghi acknowledged last Thursday that the pace of economic growth in the euro zone as a whole had moderated since the ECB last met in March.

Traders will recall that last October the ECB announced that, beginning in January, it would reduce its monthly volume of asset purchases to 30 billion euros a month from 60 billion, as a starting-point for its normalization of monetary policy. Is it a coincidence that a moderation in euro zone growth is now being evidenced just a few months later? Certainly, data on Monday showed a slowing in the rate of increase of a key measure of money supply, M3. If euro zone economic growth continues to moderate, markets may begin to wonder whether the euro zone economy can afford to live without the ECB’s asset purchases. If that notion were to gather momentum, it could conceivably have significant negative consequences for the value of the euro.

Written by Neal Kimberley, External Currency Analyst.