EUR/USD Flat as German Business Confidence Rises

Alan Penny

18 December 2019

4 min read

USD/EUR trading

  • German business confidence hits a six-month high
  • Experts expect German GDP growth to be weak in early 2020
  • US dollar under pressure due to impeachment vote

The EUR/USD remained flat despite a rise in German business confidence figures and positive US economic data. The currency pair was hovering around the $1.1132 mark.

After surveying 9,000 companies, the Ifo ascertained that sentiment had increased from 95.1 in November to 96.3 in December.

According to the Ifo Institute, a think tank based in Munich, business confidence in Germany reached a six-month high. After surveying 9,000 companies, the Ifo ascertained that sentiment had increased from 95.1 in November to 96.3 in December.

German confidence still low

While confidence improved from the trough it hit in August, it still isn’t anywhere close to the figures registered at the start of 2019.

According to Jack Allen-Reynolds of Capital Economics, the December figures are in line with stagnant economic growth. He stated that GDP growth is likely to be weak at the beginning of 2020.

Germany’s economy is driven by exports, and it has suffered due to various global events. Brexit uncertainty, global trade tensions, and a troubled automotive industry almost pushed the country into a Q3 recession. However, official data show that exports are on the rise. Investor sentiment is also improving. This has led some to believe that the future for the German economy is somewhat brighter.

Despite the improved sentiment, the German manufacturing sector is still experiencing significant hardships. The chief economist of ING Germany, Carsten Brzeski, stated that the Ifo index indicates that the worst is over. However, he also stated that “a tangible bottoming out is still hard to find,” despite everyone’s desire to see the German economy pick up.

“The widening gap between a weak manufacturing sector and solid consumption as well as a strong labor market looks hard to sustain. Something has to give,” he explained.

US dollar under pressure ahead of House’s vote to impeach

Today, the US House of Representatives is due to vote on whether they will impeach President Donald Trump.

A vote in favor of impeachment will make Trump the third US president to actually be impeached, as Nixon resigned before proceedings could get underway. Bill Clinton and Andrew Johnson were impeached in 1998 and 1868, respectively, but both were acquitted by the Senate.

US industrial production rallied, indicating that a Fed rate cut won’t happen soon. This helped strengthen the US dollar against certain other currencies. However, the upcoming impeachment vote in the House put enough pressure on the currency to keep the EUR/USD flat.

If the vote is in favor, of which there is a strong chance since the House has a Democratic majority, the final decision will then be up to the Senate. The Senate vote will take place in January. Analysts have stated, though, that support has dropped from the impeachment. Furthermore, the Senate has a Republican majority, which seems to indicate an acquittal is likely.

Even the news of the phase-one trade deal finalization between the US and China didn’t boost the US dollar against the euro. If the deal goes through, it will be positive for both currencies. The US dollar will benefit from increased exports to China, while the German economy will also receive support.

However, some Chinese officials still believe tensions still exist and haven’t been completely resolved. They are, therefore, cautious. Some experts also point out that the deal will be signed by the trade representatives of both countries. It seems that President Trump and President Xi Jinping won’t be the signatories. Some believe this is an indication that tensions still exist, while others put it down to simple technicalities.

What’s to come?

Charles Evans, the head of the Chicago Federal Reserve, is due to hold a speech today. Analysts believe that an overly dovish stance will drive the EUR/USD higher.

However, in the mid- to long-term, the United States’ efforts to reduce its trade deficit with the Eurozone could harm the euro.

Brexit concerns will likely continue to affect the euro. British PM Boris Johnson is pushing to outlaw any delay, which has once again raised fears of a hard Brexit.  The latter wouldn’t just affect the British economy, but confidence in the Eurozone too.

Written By
Alan Penny

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