Market Analysis

Euro at risk of further downside from deteriorating German data

The euro currency is at risk of further downside on the foreign exchange market this week, after data last Friday showed that the German manufacturing sector contracted for the third consecutive month. The much worse than expected manufacturing PMI reading for March compounded fears amongst investors that Europe’s largest economy could be headed towards an economic recession.

The 44.7 manufacturing PMI headline reading was the weakest for the German economy in six years and widely missed the expected 48.0 reading. Worryingly for the German economy, data inside the March PMI showed that German companies are now starting to lay-off workers in the manufacturing sector, as new orders contracted for a sixth-straight month.

Weakening global demand for German-made goods and cars, uncertainty towards Brexit, and ongoing US-China trade tensions all contributed to the slowdown in the German manufacturing sector. The German economy all faces the very real prospect of trade tariffs on car exports into the United States from the Trump administration.

This week the German economy releases IFO survey, consumer confidence, and inflation data whilst also holding a key 10-year government bond yield auction. Last week the German 10-year bond-yield turned negative for the first time since October 2016, with the German bond market offering its strongest sign yet that a recession may be coming.

Another key event traders will be watching this week will be European Central Bank President Mario Draghi’s speech in Frankfurt, Germany on Wednesday. Euro bears will be watching Draghi’s scheduled speech closely for any signs that the outgoing ECB President may be willing to offer Europe’s struggling economies even greater monetary policy accommodation.

The euro currency fell quickly in the aftermath of last Friday’s weaker than expected German data, with the single currency tumbling the most against the Japanese yen. The EUR/JPY has been relatively tame, with last weeks sharp drop possibly hinting that the pair could start to come life once again.


EUR/JPY Weekly Mountain Chart | Source: ActivTrader

EUR/JPY Weekly Mountain Chart | Source: ActivTrader 


Technically the EUR/JPY pair is vulnerable while trading below the 125.00 level, with the weekly chart showing key support located around the 123.40 and 119.00 level. With safe-haven currencies in demand and the potential for further euro weakness, EUR/JPY shorts could start to look more attractive.


Written by Nathan Batchelor, External Analyst


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