The problems of the German economy and the data on industry did not impress

Recently we have been flooded with very weak data about the German economy. You have to remember that this is it largest economy in Europe, therefore activity in other places on the continent also depends on its condition.

Due to the fact that it is Poland's largest trading partner, it is of great importance for our GDP. Will Germany's weakness affect further stagnation in the euro zone and will deprive you of the possibility of reflection on EUR/USD pair in the coming months? Also looking at the improving situation in the US?

Bottom in the economic cycle

We have published a lot of data from Germany. Latest final data CBA for the fourth quarter do not give reasons for optimism, although they turned out in line with expectations. Non-seasonally adjusted data showed a GDP decline of 0,4% y/y, in line with expectations, but in the third quarter we had a decline of 0,8% y/y. Earlier, there were some prospects for recovery. Data on industrial orders increased strongly, although they resulted from large one-off orders in aviation and railways. Industry data was no longer impressive – we saw declines there all the time.

Yesterday we learned the disastrous data regarding the PMI index for manufacturing - it dropped to 42,3 points and broke the steady improvement in the situation since August last year. Although the index remained below 50 points and indicated further economic contraction, the mood was improving. Now the PMI points further to big weakness at the beginning of the new year. Some economists could further suggest a local trough in the economic cycle, taking into account the Ifo index's attempt to rebound. However, it should be remembered that today's rebound to 85,5 points was small from the level of 85,3, which was also the lowest level for this indicator until 2009.

US monetary policy is the key

Can EUR/USD increase in such conditions? It will be very difficult and a possible rebound should not depend on the situation in Europe. It is difficult to expect the situation to change suddenly. In Europe, gas prices have fallen to almost pre-Covid levels, oil prices are lower than a year ago, and yet we observe further stagnation. Of course, interest rate cuts or even the QE program could save the economy, but given the current continuing problem of inflation, this would not be a good move. Therefore, the hope for a rebound on EUR/USD is the monetary policy in the USA.

In recent sessions, there has been a clear hawkish turn in expectations for the United States, although it still seems that May may be in play in terms of a rate cut. The Fed may want to avoid a stagnation scenario and decide on faster discounts. At the moment, the probability of cutting interest rates in May has dropped below 30%, and for June it is estimated at below 80%! However, if some data from the US start to disappoint more, such as retail sales and industrial production, then May may once again become a base option for an interest rate cut.

Today, after 11 a.m. on the last day of the week, we observe low volatility on the currency market, although there is a slight advantage of the dollar. Therefore, we pay PLN 4,0082 for a dollar, PLN 4,3354 for a euro, PLN 5,0719 for a pound, and PLN 5,5458 for a franc.

Source: Michał Stajniak CFA, XTB