- Pronounced weakness in manufacturing activities in Germany may spread to the broader Eurozone.
- ECB may be forced to remove its “restrictive monetary policy” forward guidance next Thursday and evolve into a “recession fighting” move.
- The medium-term downtrend of EUR/USD remains intact but a mean reversion corrective rebound may occur first below 1.0770 key medium-term resistance.
For next Thursday, 12 December European Central Bank (ECB) monetary policy outcome, market participants are likely to expect a 25-basis point (bps) cut rather than a more aggressive reduction of 50 bps based on short-term interest rate futures pricing.
If such a scenario occurs, it will be the fourth interest rate cut in the Eurozone since June to lower the key deposit rate further to 3%. Hence, it will be paramount to scrutinize the latest ECB’s forward monetary policy guidance for hints of further and or more aggressive monetary policy stance in 2025 via its latest macroeconomic projections which are released next Thursday as well, and ECB President Lagarde’s press conference.
Weakness in German Manufacturing Growth has Spread to the Wider Eurozone
Fig 1: Germany, Eurozone Manufacturing PMI & 2-year yield spread of German Bund/US Treasury Note as of 5 December 2024 (Source: MacroMicro)
“When Germany catches a cold, the entire Eurozone has the flu”. Germany, being the bellwether economy of the Eurozone has continued to flash out recessionary-liked leading economic conditions.
After a peak of 45.50 seen on the German manufacturing PMI at the start of 2024, manufacturing activities continued their downward spiral of deterioration and further contracted in November to 43.
Notably, the January 2024 peak of the German manufacturing PMI before it inched down further occurred ahead of the broader-based Eurozone manufacturing PMI that peaked later in May. Thereafter, it increased its pace of contraction to hit 45.2 in November from 46 in the previous month of October.
Therefore, if manufacturing activities in Germany continue to slip further in the red, it may drag down the entire Eurozone’s economic growth prospects.
This negative feedback loop mechanism has already been playing out in the 2-year yield spread between the German Bund and the US Treasury Note where the yield spread peaked at -1.34% in mid-September 2024 and dropped significantly by 80 bps to hit -2.14% on Thursday, 5 December which was a 2-year low (see Fig 1).
To negate the adverse effects of “Germany’s flu” on the entire Eurozone, the ECB may need to set a forward guidance in the upcoming meeting next Thursday, 12 December that restrictive monetary policy is over, and preventing recession is now the priority in the Eurozone.
EUR/USD is Shaping a Potential Corrective Rebound Within its Medium-Term Downtrend
Fig 2: EUR/USD medium-term & major trends as of 6 Dec 2024 (Source: TradingView)
In the lens of technical analysis, the directional movement of highly liquid tradable financial instruments does not move vertically but oscillates within broader trends.
Since its recent 52-week low of 1.0332 printed on 22 November 2024, the EUR/USD has consolidated in a sideway range configuration ahead of today’s key US non-farm payrolls data release.
Its daily RSI momentum indicator has just staged a bullish breakout above a key parallel descending resistance after it hit an oversold condition on 22 November, the same day as the current 52-week low (see Fig 2).
The current condition of the daily RSI indicator suggests that bullish momentum has surfaced to at least support a potential mean reversion corrective rebound scenario with intermediate resistance to watch at 1.0670, and above it exposes the 1.0770 key medium-term pivotal resistance before another round of impulsive down move sequence materializes to resume its medium-term downtrend phase.
Only a break below the intermediate support of 1.0420 reinstates a direct bearish tone to see the next medium-term support coming in at 1.0200.