DAX strength and EUR/USD weakness expected to persist after disappointing GDP readings
EUR/USD weakness and DAX strength has been a feature of recent months, and that looks likely to continue ahead of key February data releases next week.
Today’s German growth data proved tough reading for those used to more prosperous times at the economic powerhouse of Europe. With the country failing to grow in the fourth quarter (Q4), there is little optimism for euro traders who have watched EUR/USD lose 13% in the past two years.
Within that period, we have seen significant gains in just five of 24 months, and there is little sign that we are on the cusp of reversing that trend. Things are certainly rosier for European stock holders, and with the DAX hitting record highs, there is a good chance we will continue to see these two markets diverge further.
Today’s uninspiring growth figures from the eurozone should come as no surprise given the recent uninspiring factory orders and industrial production figures out of Germany in December.
Germany remains in focus in a week full of data points
Next week provides us with a host of data points to further our opinion of where the eurozone and German economy is. From a German perspective, the data we will be watching out for in the week ahead are more sentiment-based, with February ZEW economic sentiment and Gfk consumer sentiment surveys preceding the services and manufacturing purchasing managers index (PMI) readings on Friday. The wider eurozone will also have plenty to look out for, with consumer confidence and PMI readings for the region expected to bring further volatility for the euro and DAX. However, the week ahead brings a shift away from the recent 2019 data (gross domestic product (GDP), factory orders and industrial production), towards more relevant figures.
The manufacturing sector decline certainly has been showing some signs of reversing, with the German PMI rising to a 11-month high despite remaining within contraction territory. Thus, traders will be keeping a very close eye on whether this recent rise in the PMI surveys will continue apace. One huge concern comes in the form of the coronavirus, and it is worthwhile keeping a close eye out for these latest readings to gauge exactly how German and eurozone businesses are being impacted by the largely China-focused crisis.
DAX surges into record highs despite fears
The DAX has enjoyed a huge surge over the past two weeks, with fears over the coronavirus failing to dent optimism throughout many of the world indices. The weekly chart highlights this rally, with the price breaking through trendline resistance to reach a new record high. This rally highlights how removed the German stocks are from the wider economic plight, with zero growth in Q4 tallying up with record highs for stocks. With that in mind, there is little reason to believe this cannot continue.
The four-hour time frame provides us with a more granular view of things, with the price rallying towards new highs as we close out the week. The short-term trend remains intact as long as we continue to create higher lows. With that in mind, further upside looks likely until we see a break below 13,577. Should that occur, we would be looking at a potential wider pullback coming into play, similar to that seen in late January.
EUR/USD declines reflect economic demise
EUR/USD is more aligned with the economic weakness that conitnes to play out in the eurozone, with the euro in particular being hit hard across the board in recent weeks. The weekly EUR/USD chart highlights an ongoing downtrend that has lasted two years.
However, looking back at the monthly chart, it is evident that the EUR/USD decline has been relatively consistent since the $1.6038 peak 11 years ago. The breakdown through $1.0879 has been hugely notable this week, bringing about the lowest level seen in April 2017. However, this decline has also been hugely notabe for the fact that we have seen price break below the 76.4% Fibonacci retracement at $1.0863. When we see such a breakdown, it provides us with greater confidence that the downtrend is going to continue and that we could be heading towards the $1.034 lows in time.
Finally, the hourly chart highlights a remarkably consistent downtrend over the course of February thus far. Price action continues to trade within a descending standard deviation channel, with lower highs and lower lows playing out to confirm the continuation of this trend. With that in mind, further downside looks likely before long, with a bearish intraday outlook in play unless we see a break through the $1.0889 resistance level.
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