German manufacturing PMI for July came in at 52.1 missing expectations of 54.1 and falling from 54.6 in June, marking the 4th drop in the last five readings and the lowest showing since October 2009. Meanwhile, its services PMI came in at 52.9 badly missing expectations of 56.1 and falling from 56.7 in June, marking its lowest reading since February 2010. The soft reading comes as not much of a surprise after the dreadful French readings earlier and the rather shocking sub-50 version out of China over-night.

We have been pontificating for several weeks now about the slowing German economy and its rather ominous implications for the euro-region which finds itself at its darkest hour with several periphery nations tottering and its debt crisis threatening to spill over to core nations. The robust German growth in 2010 and early 2011 had been a beacon of light in the gathering gloom, it had helped negate the negative growth in other nations and boosted economic activity. Additionally, its sizeable trade surpluses helped justify large contributions to aid packages for periphery nations. However, as all this evaporates and the last light of the euro-area flickers before finally going out the outlook is not good.

While we see little risk of negative growth – the PMIs slipping below 50 – the surveys could still dip further in coming months before leveling off at low expansion levels. We foresee greater problems on the political front, however, as domestic politics in Germany is likely to be refocused on keeping unemployment numbers low and the economy chugging along. Public opinion could turn very quickly against further bailouts for their less responsible neighbors. If the German government is forced, by public opinion, to take a less willing stance in bailing out other nations then we could see several defaults in relatively quick succession.

German_PMIs_Keep_Slowing_As_Soft_Patch_Takes_Hold_Outlook_Bleak_body_eur.png, German PMIs Keep Slowing As The 'Soft Patch' Takes Hold; Outlook Bleak

The euro took an immediate hit as the market comes to terms of slower growth from the euro-area’s largest and most robust economy. After early chatter about several ACBs out in the market helped lift Eur/Usd above the 20-day SMA at 1.4270 this bout of data is likely to prove something of a weight intraday. However, direction into the end of the day will be directed by the outcome from the EU leader’s summit which is taking place today and is set to discuss a second aid package for Greece, something that German and French leaders have apparently already agreed the terms of. While the outcome of today’s meeting is likely to direct trade into the weekend players will have to come to terms with the worsening growth situation across Europe and around the world which could see some liquidation of risky holdings in favour of safe haven assets until global growth picks up.

Written by Jonathan Granby, DailyFX Research Team