Traders eye weak German economic data and trade war risk

The German economy has seen weaker business sentiment following the trade war narrative, although consumer spending and unemployment levels remain robust.

The trend is your friend

A closer look at the DAX.

Business climate data

This week has seen the latest release of the German Ifo Business Climate Index (from the Institute for Economic Research) set a dull tone for sentiment within the region. The index which is compiled by survey responses from 9000 business leaders in the manufacturing, services, trade and construction sectors was reported at its worst level in five years.

The Ifo Business Climate Index is considered a leading indicator of economic health in Germany, finding more frequent availability than data points such as the nation’s quarterly gross domestic product (GDP) release. The relevance of the most recent report is that it marks the third consecutive month of decline, which is suggestive of a bearish economic environment for Europe’s largest economy.

Gross Domestic Product (GDP)

While the recently released quarter one (Q1) 2019 GDP results showed 0.4% quarter-on-quarter (QoQ) growth for Germany, it follows on from 0% QoQ growth in Q4 2019 and a 0.2% economic contraction in Q3 2019, further evidence of a sluggish economy.

Employment

On the other hand, German employment has remained at an impressive 3.2% for the last four months in a row, which is a near 40-year row.

Trade war risk

The US-China trade war narrative continues to threaten the pace of global economic growth. China is Germany’s third largest export destination and largest import origin. The US is Germany’s top export destination and fourth largest import origin. While a slowdown in either or both the US and Chinese economies will have a direct impact on Germany, there is a further threat of the US imposing higher tariffs on European automotive imports. These threats by US President Donald Trump, have weighed on the region’s equity markets this year. However, there has been some relief following Trump's decision to delay an increase in import tariffs for 180 days pending negotiations. The automotive tariff decision will be reviewed in November 2019.

EUR/USD: Technical view and client sentiment

The recent crossover of the 20-day simple moving average (SMA) with the 50-day SMA suggests that the short- to medium-term trends for the EUR/USD are up. We have also seen the price now trading above the 200-day SMA, a suggestion that the longer-term downtrend has been broken (although this is not yet a confirmation of a longer-term uptrend just yet).

The stochastic does however show the EUR/USD price to be overbought at current levels, although we place greater importance on the trend indications (moving averages) than the momentum indication (stochastic).

The price action for the EUR/USD shows that the currency pair has pushed to a new short term high, before correcting to support at $1.1347. In line with the trends mentioned on our previous chart, we prefer keeping a long bias to trades on the currency pair for now.

The initial upside resistance target is $1.1447, a break of which (with a close above) would consider $1.1513 a further upside target. Should the pair move to close below support at $1.1309, the bullish bias would need to be reassessed.

At the time of writing (27 June 2019), 59% of IG clients with open positions on the EUR/USD currency pair expect the price to rise, while 38% of IG clients with open positions on the currency pair expect the price to fall.

DAX: technical view and client sentiment

The short-, medium- and long-term trends for the DAX remain up, as evidenced by the price trading firmly above the 20-day SMA (red line), 50-day SMA (green line) and 200-day SMA (blue line).

The price channel on our chart provides further evidence of the uptrend in place for the index. Trend followers might look to the reversal off horizontal support at 12,460 for long entry, targeting a move towards initial resistance at 12,460.

A break above this level would see channel resistance at 12,950 as a further upside target. Should the index price start to trade below the support line of the channel, the uptrend would need to be reassessed.

At the time of writing (27 June 2019), 62% of IG clients with open positions on the index expect the price to rise, while 38% of IG clients with open positions on the index expect the price to fall.

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