EURUSD Analysis: Crucial Support in Focus, Germany at Risk of Recession

2019-01-08 09:00:00

Justin McQueen, Analyst

EUR Analysis and Talking Points

Germany Heading for a Recession
Downside Risks to Growth and Inflation to Postpone ECB Rate Hike

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Germany Heading for a Technical Recession

German data continues to deteriorate with the latest industrial production figures falling sharply. The monthly rate surprised to the downside with a fall of 1.9% (Exp. 0.3%), which in turn dragged the yearly rate to -4.7% (Exp. -0.8%). This also follows yesterday’s weak factory order, consequently increasing the risk that Germany is heading for a technical recession. As such, EURUSD is softer this morning in reaction to yet another soft reading out of Germany, while resistance at 1.15 also proved to be a stumbling block for the pair. This in turn increases scope for another test of key support at 1.13. As a reminder, German GDP contracted by 0.2% in Q3, which was the worst performance in 5yrs. Next reading is scheduled for February 14th.

Downside Risks to Growth and Inflation to Postpone ECB Rate Hike

Not only is it growth that is heading lower but also inflation risks in the Eurozone are increasingly skewed to the downside, with the latter being weighed by the fall seen in oil prices. Last week saw headline Eurozone inflation drop to 1.6%, while the core reading remained subdued at 1%. Subsequently, this suggests that a deposit rate hike by the ECB this year looks somewhat doubtful. Money markets currently attach 45% chance of a 10bps rate hike by the year end.

IG Client Sentiment – Current sentiment shows 57% of clients are short EUR/USD, while signals are mixed.