Can the EU Economy Survive With Germany Slowing? Key Sentiment and GDP to Tell the Story

Like the most recent weeks, the Monday trading session was simply a time to shake off the cobwebs from the summer fun.  There was little in the way of economic releases or events to ignite the market one way or the other.  

However for the rest of the week, there are some things that could have a direct impact on the forex market in particular out of Germany. The question traders will be asking themselves this week is "Can the EU economy survive with a slowing German economy?". Some key releases out of that country will be a key focus for forex traders.

Below is a a review of the most important releases this week, and my thoughts on some key technical levels to eye.  

German ZEW (Tuesday 5 AM) and German, France, EU GDP (Thursday from 2:00 AM to 5 AM ET).  

On Thursday, the market will be focusing on GDP coming out of the EU, Germany, and France.  As a prelude to that data will be the German ZEW Economic Sentiment Indicator for the month of August (Tuesday at 5 AM). This indicator looks to gauge the economic health of the German economy by surveying 275 German institutional investors and analysts as to their 6 month outlook for the economy. 

For August, the estimate is for the survey expectations to tumble to 17.0 from 27.1.

What concerns me about the release – and the estimate – is that the expectations is for a fairly big fall from the prior month. I have looked at recent history of the estimates, and for the most part the estimated changes from the prior month has been only about 3 points at the most. This estimate – for a 10 point decline from 27.1 to 17.0  – is indicative of bearish expectations for German economic health.   

The other concern is that the estimate for the 10 point decline is coming after a pretty steady decline since reaching the 6 year peak at 62.0 in December 2013.  Since that time, the index has declined from 62.0 to 61.7, 55.7, 46.6, 43.2, 33.1, 29.8 and 27.1 last month.  The 17.0 level – if it were to materialize – is the lowest since December 2012.  

Germany is the largest and most healthy of the EU economies. If the expected growth and inflation is to pick up, it will need continued growth from Germany. Moreover, the survey comes after the stimulus from the ECB in June, and the anticipated stimulus from the TLTRO which won't go into effect until September 18th.  One might think such measures would be a reason for more optimism, not less. 

Supporting the negativity for Germany is the German Stock market which is down 3.89% for 2014 – the worst performer of the continental bourses.

On Thursday starting at 1:30 AM ET, France, Germany and the EU will release GDP estimates for 2Q. France is expected to post a +0.1% increase for the quarter, Germany is expected to come in with a -0.1% decline and the EU Flash estimate is for a small 0.1% gain. Last week, Italy surprised with a -0.2% decline (vs estimate of +0.1%).   

If the ZEW Survey does match or exceed the expectations on the downside or if the growth for the 2Q come out weaker, look for the EURUSD to begin a new new leg down for the pair.  A key technical clue for traders will be if the price of the EURUSD can move and stay below the 1.33750 level which is the 50% midpoint of the move up from the July 2013 low to the high reached in May 2014.  The price for the EURUSD moved below this level in last weeks trading, but could not sustain the selling pressure.  The move higher on Friday off optimism on Russia/Ukraine helped push the price back above this key level.  A push back below this level, would likely be met with more selling interest from both a fundamental and technical perspective.

The next major targets on the downside would extend to 1.3250, 1.3104 (low from September 2013) and the 1.3016 (midpoint of the move up from June 2012 low. 

If the price is not able to sustain a move below the 1.3375 level, look for a move above the high of last week at the 1.3431 level (RISK level for shorts now) to lead to a test of the 1.34724 level (38.2% of the move down from the July high). Above that, the 1.35158 is the 50% of the move down from the July high. I would not expect the price of the EURUSD to NOT get back above this area.

Other key events and releases:

BOE Inflation Report (5:30 AM ET Wednesday) – The Bank of England quarterly inflation report outlines the BOE projections for inflation and economic growth over the next 2 years.  The report will be accompanied by a press conference headed by BOE Governor Mark Carney.  The market will be focused on any schedule for rate hikes. The market is expecting the BOE to hike rates by 25 basis points by March 2015. However, the most recent earnings report showed the annualized 3 month earnings only growing at 0.7%, the lowest level going back to at least 2001. The market will also be focused on references to slack in the employment. 

The GBPUSD has been trending lower since peaking in July and last week broke back below the 100 day moving average at the 1.6879 (currently).  Stay below, and the sellers remain in control this week.  

On the downside, the 1.6720 level is the midpoint of 2014 trading low to high trading range and should solicit a support bid at least on the first look. A  move below could open the door for a more sustained move toward the 200 day MA which currently comes in at the 1.66152 level. 

PS. In the UK Job data for July will be released at 4:30 AM ET just prior to the Inflation Report.

US Retail Sales (8:30 AM, Wednesday). It takes two to tango with forex trading, and the US will release the Retail Sales figures for July on Wednesday at 8:30 AM ET. The estimate is for a uninspiring 0.2% increase with a 0.4% increase if you strip out the Auto and Gas components.