EUR/USD Finds It Hard To Recover As Germany Contracts

When stagnation is considered good news – it spells trouble for the economy – and for the currency. Germany has reported its economy stagnated in the 12 months ending in June after contracting by 0.1% in the second quarter. Forward-looking surveys – considered “soft data” – have now been confirmed by the evidence of past activity – the “hard data.”

Looking at current surveys and partial figures for the current quarter, and the euro zone’s largest economy is probably headed to an outright recession – defined as two consecutive quarters of contraction. As a whole, the euro area continued growing in the spring – but by only 0.2%. That initial read will likely be confirmed later on.

Chancellor Angela Merkel has said that the economy is entering a “difficult phase”, adding that “We will react depending on the situation.” Her words seem to open the door to fiscal stimulus – a departure from the frugal policy and the strive for a balanced budget. Germany can afford itself to spend on crumbling infrastructure and other programs as investors are queueing to lend it money. The 10-year bund yield has hit a new low of -0.62% – meaning that investors are paying the government over six euros for every 1,000 for the privilege to lend money to Berlin.

Germany’s economic malaise can be blamed on the global slowdown and falling demand from China. The world’s second-largest economy has reported disappointing industrial output growth of 4.8% YoY in July – the lowest in over a decade. The Chinese slowdown is partly due to the trade war with the US – which has finally seen some good news.

The White House announced a delay of some new tariffs on Chinese imports from September 1st to December 15th – to ease the pain for US shoppers ahead of Christmas – in a U-turn from the dramatic imposition of duties less than two weeks ago. President Donald Trump had previously said that his levies policy hurts only China. His about-turn has boosted stocks and sent the dollar higher – as chances for a Fed rate cut have fallen.

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