Euro Tumbles as Germany Enters Recession

EUR/USD ANALYSIS

• German Q1 GDP confirms technical recession over the winter period.
• US GDP, ECB speakers and debt ceiling updates to drive EUR/USD today.
• Technical indicators do not rule out further downside for the euro.

EURO FUNDAMENTAL BACKDROP

The euro continues to lose ground against the US dollar this morning after German GDP (see economic calendar below) surprised markets indicating Europe’s largest economy has entered into a technical winter recession. Two consecutive negative quarters is the official definition of a recession giving the euro bulls little optimism in a risk averse environment.

The US debt ceiling remains at the top of investors minds and with no deal on the table, markets are becoming increasingly more jittery – playing into the safe haven hands of the greenback. The Fitch ratings agency supplemented the already nervy market by placing the US on negative watch for a possible downgrade as a consequence of ongoing debt ceiling talks.

The day ahead features several European Central Bank (ECB) speakers and it will be interesting to see whether they cite the recent German GDP report in what has been an extremely hawkish narrative of recent.

From a US perspective, US GDP is the only high impact event to come alongside the Fed’s Collins. Yesterday’s FOMC minutes didn’t help the situation for the euro with many officials either looking at a pause or another hike in the June meeting. That being said, moving forward the door is open for additional rate hikes should the need arise. This gives more significance to key US economic data including today’s GDP and tomorrow’s core PCE price index, durable goods orders and Michigan consumer sentiment.

EUR/USD ECONOMIC CALENDAR (GMT +02:00)

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action has just breached below the 1.0736 key area of confluence looking to the 1.0700 psychological support handle – last seen in March 2023. There is still scope for further downside particularly if the current risk off sentiment continues. That being said, with so many moving variables to consider this week, the pair is very much at the mercy of external fundamental macro drivers.

Resistance levels:

• 1.0900/ 50-day MA (yellow)
• 1.0800
• 1.0736

Support levels:

IG CLIENT SENTIMENT DATA: BEARISH

IGCS shows retail traders are currently LONG on EUR/USD, with 62% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term downside disposition.

Contact and followWarrenon Twitter:@WVenketas