EURUSD Bear Continues; Bounces Are Targets As Germany Languishes

German industrial production is in dire straits; hurt by trade wars and declining Chinese demand. The EURUSD is reflecting this weakness and any bounces are likely to be viewed as bear market rallies.

German Industrial Production Weakness

Since January 2018 German industrial production has been heading south-east. This is clearly denoted by the red downtrend line, to the point that the series decreased 6.8% in December 2019 year on year. This has largely been due to trade wars and declining demand from China. However, structural issues, especially in the automotive industry, are also largely to blame. Considering this sector accounts for 7-8% of the German economy these need to be addressed. It is worth noting that monetary policy cannot address structural inefficiencies and thus targeted fiscal policy is needed.

This is not likely to be forthcoming due to heighted party issues within the ruling CDU. In fact, a new leader selection process is currently under way after Annegret Kramp-Karrenbauer stepped down last week.  Moreover, Chancellor Merkel is being pressed to step down so that the new leader is in the “limelight” and not crowded out by the chancellor. This after Merkel relinquished the party leadership but stayed on as chancellor.

Of note, even if party politics are resolved, Germany’s schwarze Null or black zero policy limits fiscal expansion. As such, pressure is likely to remain on EURUSD

EURUSD Looks Ill

The left chart shows the EURUSD’s daily time frame. The currency pair is below its black 20-day SMA and the SMA is pointing down. This is symptomatic of the downwards momentum of  the single currency. We do note that the RSI is oversold (blue rectangle) and will need to normalise soon. The right chart shows the hourly time frame. A rally to normalise, at these levels, may cause a short squeeze and drive prices up towards the upper pivots (R2-R4). However, given the current bleak economic outlook and the strong carry for selling euro, the upside is likely to remain limited for the medium term.