Euro Down On Contraction of German Construction Sector Data

Euro Down On Contraction of German Construction Sector Data
August 7, 2019


The eurodollar fell against the greenback yesterday despite the release of better than anticipated German factory orders data. The US-China trade tensions and contraction of the German construction sector were the main reasons for the decline. Many analysts believe that the Eurozone economic growth is slipping into a downward spiral. From a high of 1.1249, the EUR/USD pair declined to a low of 1.1167 in the past 24 hours.

Data from Destatis indicated that German factory orders bounced back in June, led by robust demand from non-euro sector economies. Factory orders increased 2.5% m-o-m in June and reversing a 2% decline in May. Analysts had anticipated the factory orders to increase by 0.5%.

Thomas Gitzel, Economist at VP Bank, opined that the data does not warrant celebration: “The decent increase in June is good news, but is no cause for immediate celebration. In view of the trade conflicts, humility is required.”

Overseas orders boosted factory orders by 5%. However, fresh orders from the Eurozone declined by 0.6%, while new orders from other nations increased by 8.6%. Domestic orders fell by 1% in June.

Barring big-ticket orders, total orders received in June declined 0.4% from the earlier month. On a yearly basis, factory orders fell 3.6% in June, compared with 8.4% decline in May. Economists had anticipated factory orders to decrease by 5.3%.

In the second quarter, total new orders declined 1% sequentially, much slower than the 4.2% fall recorded in the earlier quarter. A considerable drop in orders in the past few months indicate that overall production has declined. As a result, the increase in factory orders last month is being considered by many industries as only a temporary recovery in a continuing downtrend. Ralph Solveen, deputy head of economic research at Commerzbank anticipates German manufacturing sector to remain sluggish in the third quarter. This implies that the economy will contract again in the current quarter.

Additionally, Destatis data also indicated that manufacturing turnover declined 0.1% m-o-m in June after contracting 1.3% in May.

Furthermore, the Purchasing Managers’ survey indicated that Germany’s construction sector contracted for the first time in nine months. The PMI dropped to 49.5 in July, from 50 in the earlier month.

Destatis will be releasing industrial production data later today. Economists anticipate output to decline 0.5% m-o-m in June, after recording a 0.3% growth in May.

Regarding the contraction of the construction sector, principle Economist at IHS Markit, Phil Smith said: “As is the case with manufacturing, there is an increasing drag on overall economic output from the construction sector in July. The survey’s indicators of total activity and new orders have maintained their recent slide, with the former now at its lowest since March 2018. However, it’s difficult to untangle how much of the slowdown still represents payback from the very strong start to the year, and how much is due to weaker underlying demand.”

In the meanwhile, political developments in the US indicate the Eurozone economy will continue to slow down, which is not good news for the euro even though the US is also anticipated to decelerate too.

Mark McCormick, head of FX strategy at TD Securities, explained why taking a long position in the euro is a bad idea: “Other factors driving the FX market don’t argue for tactical long EUR exposure either. Our tracking of growth momentum remains tepid, and European equities continue to lag the US. The forward-looking implications of Trump’s recent actions should reinforce these themes rather than reverse them. The other lingering concern is whether Trump will pivot to autos this fall, which is likely to contain rallies in the EUR in the interim.”

The anticipation of an economic slowdown in the Eurozone and contraction of the German construction sector is anticipated to keep the euro bearish in the short-term.

The price chart indicates that the EUR/USD pair is declining after facing resistance at 1.1250. The next major support is anticipated at 1.1140. Additionally, the RSI indicator is making lower highs. As a result, we are expecting the currency pair to move down in the short-term.

eur - technical analysis - 7th Aug 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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