Challenges facing Germany and the Euro
Following the weakness seen earlier in the week in German flash PMIs, today's IFO survey is likely to paint a bleak picture for the German economy in terms of the current business climate and confidence.
We saw a contraction in both manufacturing and services, along with energy prices surging to alarmingly high levels. This forms a pincer movement that is causing pain in Germany and the wider eurozone. It would be surprising if today’s survey did not continue this gloomy picture.
We will also get a final update on how the German economy performed in Q2; however, no change is expected to the initial estimate of zero percent. The minutes of the last ECB meeting will also be released.
When we look at the technical picture, we can see the challenges facing Germany.
This year has seen a perfect storm of volatility when it comes to the DAX, and European markets in general. The fallout from the Russian invasion of Ukraine and the subsequent elevated energy prices have been well documented. When laid over a struggling economy and a struggling currency it has made for challenging times for European bulls.
When we look at the technical picture of the DAX40 we can see how prices have reflected those concerns. We entered 2022 with the price printing a Double Top reversal pattern at 16285 on 4 January – which proved to be the top of the year. The price has declined by more than 3800 points since then. We have seen a base established around 12400 area, with a sloping downtrend providing resistance.
Many technical analysts would see this as a descending triangle pattern, a continuation pattern, and market participants will be watching to see if the support can continue to hold. Should it break then we could see net levels of support down at the 12000 Big Round Number (BRN) and also at 11,500.
The woes of the DAX40 are equally reflected in the strength of the Euro - or lack thereof. US dollar strength has also helped cause a strong downtrend all year in the EURUSD.
From 2022 highs of just under 1.1500 we have seen the EURUSD move in one direction for all of 2022. We now find ourselves at parity with the USD. Longer-term position traders will be focusing on the close of the weekly candle this week and the monthly candle next week. Closes beneath parity on higher time frames do not bode well for the future direction of the Euro.