Fundamental Analysis: Euro Declines on Weaker Data and the Latest from Italy

The euro has weakened against other major currencies since the start of the trading week after a number of weaker data releases affecting the outlook for growth in the EU. Also, a factor in the common currency’s recent losses is Italy’s latest recession and the hit to sentiment caused by this. The euro fell to nearly $1.14 this morning and continued its decline against emerging currencies like the rand and lira, pulling back more significantly as well from its month high against the yen of ¥126.

Weaker German data and the Italian recession

Today’s data releases have on the whole been rather negative for the euro. Although France posted a higher reading of PMI for services, the same release from Germany and Italy came out slightly below expectations. The importance attached by traders and analysts to German data recently stems mainly from the unusually disappointing data released by the EU’s largest economy last week. German inflation, unemployment, manufacturing PMI and retail sales all missed the consensus expectations.

Although fears of a potential recession in Germany are likely to be exaggerated at this stage, sentiment has been more negative in the euro area due to the genuine concern of economic contraction in Italy. Italy remains encumbered with high public debt, about 130% of GDP. Meanwhile, Thursday’s news that the country had stumbled into the third recession of this decade was not received well by currency markets, and this continues to cause potential buyers of the euro to think twice.

More German data in view this week

It seems likely that traders of the euro will focus this week on another series of data releases from Germany. December’s factory orders are expected at 08.00 GMT tomorrow morning, then the key figure is industrial production at the same time on Thursday. These figures have significant potential to affect the direction of the euro against most major currencies.

Also of note to traders this week are Thursday’s releases of the ECB’s economic bulletin and economic forecasts. While it’s probably too early for talk of recessions to affect these releases, traders will be gauging the ECB’s projections and how they stack up with data releases.

EUR-USD and more likely to be on course for more losses

Considering fundamentals overall, the most favorable direction for the euro in the next few days is downward against the dollar and many emerging currencies. On the other hand, movements against the pound are likely to be more volatile and highly dependant on Brexit news.

Be ready to trade if negative German data cause a drop for the euro.

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