Published: November 27th, 2024
Germany’s latest Business Climate Index (BCI) survey scores the country at 85.7 in November, a fall from 86.5 in October and weaker than consensus expectations of 86.
The monthly survey by the University of Munich’s Ifo economics institute found that its current conditions index fell from 85.7 to 84.3, while the near-term outlook in its expectations index fell from 87.3 to 87.2.
A research note from Capital Economics said that Ifo’s BCI print ‘confirms that the German economy is treading water, growth-wise.’ The outlook for next year is also cooling, the firm’s analysts wrote, as rising manufacturing costs and sub-optimal demographics could act as a drag on any recovery in real household incomes, or ECB moves toward monetary easing.
The BCI figures are consistent with last week’s PMI survey for November, which showed German GDP shrinking at speed. The Composite PMI for November also indicated Germany was sliding into recessionary territory.
'The eurozone manufacturing sector is already in recession and that appears to be getting worse. After two months of tepid growth, it also seems that the services sector is beginning to struggle.’
Meanwhile speculation has begun that incoming president Donald Trump will soon have European manufacturing in his tariff gun sights. Economists at ING Bank wrote in a market analysis that it won’t be long before the new administration turns its attention to the European auto sector or applies tariffs more broadly.
While Trump’s first trade related announcements have focused on punishments for Canada and Mexico related to illegal immigration, his campaign threats to heap more tariffs on China ‘shows where America is heading in terms of its approach to world trade.’ ING says that has bearish implications for EUR.
In October, investment bank Jefferies wrote that a recent dip in the Euro to Dollar exchange rate, falling below its 200-day moving average, marked a significant deterioration in the pair’s technical outlook.
The firm’s forecast model relied on the 200-day displaced moving average (DMA), placing the pair in a multi-week downtrend when below, and an uptrend when above.
‘The 200 day moving averages can be key long-term milestones where fiat currencies sometimes get caught and stay above or below their moving averages for extended periods.’
On 20th October the 200 DMA was located at 1.0872, with signals suggesting the technical level was acting like a ceiling, even as rebounds seen the week prior attempted to rise above it.
The single currency was under pressure as more and more traders concluded that the European Central Bank (ECB) would act to cut interest rates more deeply, and at a more aggressive pace, than the US Federal Reserve would do.
That sentiment had already had an impact on Eurozone bond yields, which turned negative versus the US. In early October Frankfurt responded to the Eurozone's softening inflation readings by reducing interest rates by another 25 basis points.
Going into September, the ECB sent multiple executives, including bank President Christine Lagarde, into the Autumn financial events to circuit drop hints about what the policy future would hold for EUR. Upside risks had ECB members attempting to lower expectations for the rate of future cuts, especially given the bank’s recent aggressive footing.
EUR reached a peak of 1.1174 USD in late August 2024 and was up 2.61 per cent against the USD for the month. While momentum had shown signs of slipping, FX strategists at Convera said the EUR/USD rate could still test the 30-month range close to USD 1.12 before the month concluded.
EUR had been riding high since release of the Federal Reserve's July-end policy meeting minutes on Wednesday, 21st August. The minutes revealed that a number of Fed policymakers were ready to cut rates then and there, raising expectations for a September reduction and additional cuts in the following months
In a note to investors, Convera wrote that aggressive bets on Fed easing '(had) been overshadowed by economic weakness in the Eurozone. EUR’s August rally has been steady and consistent, pushing it to a one-year high against USD.’
Over the previous three weeks, expectations for subsequent Fed rate cuts grew faster than the schedule expected from Frankfurt central bankers, leading to a divergence in rate expectations that was expected to pull the Dollar down against the Euro.
Convera said that traders betting on EUR/USD Euro-Dollar would need to ask themselves how long the situation could continue. The risk for EUR bulls was that the trade might have already run its course, raising the prospect of a sharp pullback.
'We maintain a bearish outlook over the coming three months for EUR/USD due to ongoing political risks in both the US and Eurozone. However, EUR's recent ascent could sustain itself in the run up up to the next Fed rate cut expected in September.’
At the end of January 2024, EUR was lower against the GBP, USD, and other majors as bets began to rise that the European Central Bank (ECB) was preparing to cut rates in April or May
Two of the bank’s rate-setting Governing Council members, Peter Kazimir and Mário Centeno, told Bloomberg that an April 2024 cut could be on the horizon.
‘The bank’s next action will be to implement a cut, and it is coming sooner than later,’ said Kazimir. ‘While the exact timing is still to be determined, potentially in April or May, this is less important than the impact of the decision.’
‘There is enough evidence currently at our disposal that we don't need to wait for the next wage data release. Already we can see the trajectory inflation is likely to take,’ said Centeno. He added that his preference is for an April rate cut.
The comments gave forex traders more reason to re-price expectations around an earlier ECB rate cut, a process that began after Frankfurt's January policy meeting, and the guidance coming out of it.
