EUR/USD: is Germany in service sector stagflation?
German PMI data has highlighted the dire economic situation. IGTV’s Jeremy Naylor says the European Central Bank can't help as it must raise rates to quell inflation. Thus, the trade is short EUR/USD with new recent lower lows.
(Video Transcript)
German PMI services plunge
There's been more dire German economic data out today, with PMI services tumbling sharply from 52.3, which is expansion over 50, to 47.3, a nine-month low estimates have been for a reading just around above the 50 mark. PMI composite dropped from 48.5 to 44.7, a new 39-month low.
There was one bright spot, however. German manufacturing PMI data ticked up from 38.8 to 39.1 in August, well below that watershed between contraction and expansion. That was marginally ahead of forecast, but PMI manufacturing output fell from 41 to 39.7, a 39-month low.
So, no hope of the services sector coming to the aid of a slump in German manufacturing. Economists are now saying that there's a serious chance of stagflation in the services economy in Germany. That's contraction, while prices are rising, the worst of all worlds. It's bad news for the European Central Bank (ECB), which can only watch as it has to raise rates to quell inflation.
Dollar dominates euro
I want to show you this chart. This is the euro-dollar chart, and you can see clearly today we're down here. This is the euro down against that stronger US dollar. This is ahead of the Jackson Hole symposium, which starts on Thursday, tomorrow.
You can see here we're just resting on the red line, which is the 200-day moving average, which is a significant level of support, and it relates to levels not seen on this chart. So it's 14 June, but in fact, this is the new line, the target line to watch out for.
If you're short on this, continue to bring your stock down in and tuck it just a little bit above recent price action, and your price target will be the 106.35, which are the lows back on 31 May, and you can then see there's another step lower then, as well further on down at 105.16.
Germans face higher interest rates as prices climb
The significance of the euro-dollar here for the German economy is the fact that Germany is the largest economy in the Euro Zone, and it does have sway over what's happened, but unfortunately for the economy itself, it does have to face higher interest rates because the European Central Bank (ECB) has no option but to raise rates as prices climb.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
Start trading forex today
Find opportunity on the world’s most-traded – and most-volatile – financial market.
- Trade spreads from just 0.6 points on EUR/USD
- Analyse with clear, fast charts
- Speculate wherever you are with our intuitive mobile apps
See an FX opportunity?
Try a risk-free trade in your demo account, and see whether you’re onto something.
- Log in to your demo
- Take your position
- See whether your hunch pays off
See an FX opportunity?
Don’t miss your chance – upgrade to a live account to take advantage.
- Get spreads from just 0.6 points on popular pairs
- Analyse and deal seamlessly on fast, intuitive charts
- See and react to breaking news in-platform
See an FX opportunity?
Don’t miss your chance. Log in to take your position.
Live prices on most popular markets
- Forex
- Shares
- Indices
