EUR/USD: Euro Loses Steam as the German Economy Hits the Brakes

The Euro is deemed to weaken alongside the US dollar today after figures revealed that the German economy shrank sharply in the last quarter of 2012, suggesting that the economic stagnation amid the debt crisis had taken a significant toll on the region’s powerhouse. Likewise, comments by Luxembourg Prime Minister Jean-Claude Juncker expressing caution over the strength of the Euro are also deemed to weigh on the single currency today.

The German government forecast that Gross Domestic Product contracted by 0.5 percent in Q4, marking a weaker close to 2012 than previously estimated. The figure marks the largest quarterly fall since Q1 of 2009 and would provide further evidence that the overall Euro Zone economy shrank considerably in during the December quarter. The numbers suggest that the German economy expanded by 0.7 percent in 2012, a disappointment after posting a robust 3 percent growth in 2011. Despite reassurances from economists that growth would bounce back quickly, the data seemingly underscored how closely the country’s fate remained tied to its ailing Euro Zone allies.

Destatis said that the growth slowdown in 2012 was largely the result of sagging investment by German managers worried about the future of the Euro Zone and uncertainty over the global economic outlook. Investment in machinery and equipment dropped by 4.4 percent during the year while construction investment fell 1.1 percent. In total, investment reduced 0.9 percentage point off annual growth. On the contrary, a 4.1 percent rise in exports and a 0.8 percent increase in household consumption contributed to growth during the year. Nevertheless, analysts say that the report suggests the German, as well as the Euro Zone economy began 2013 on a soft note.

Meanwhile, the recent bullish streak of the Euro has forced Jean-Claude Juncker to warn that its strength is posing a fresh threat to the Euro Zone economy just as it shows signs of emerging from the crisis. Juncker described the single currency’s value “dangerously high” after the currency traded above $1.34 against the US dollar for the first time since February last year. The Euro has rallied 8.4 percent against the Greenback in the past six months amid growing signs in the financial markets that the debt saga is fading. Considering these, a short position is advised for the EUR/USD trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.