EUR/USD Forecast: Vulnerable at critical support as German recession looms

When stagnation is considered good news – it spells trouble for the economy – and for the currency. Germany has reported its economy stagnated in the 12 months ending in June after contracting by 0.1% in the second quarter. Forward-looking surveys – considered "soft data" – have now been confirmed by the evidence of past activity – the "hard data."

Looking at current surveys and partial figures for the current quarter, and the euro zone's largest economy is probably headed to an outright recession – defined as two consecutive quarters of contraction. As a whole, the euro area continued growing in the spring – but by only 0.2%. That initial read will likely be confirmed later on.

Chancellor Angela Merkel has said that the economy is entering a "difficult phase", adding that "We will react depending on the situation." Her words seem to open the door to fiscal stimulus – a departure from the frugal policy and the strive for a balanced budget. Germany can afford itself to spend on crumbling infrastructure and other programs as investors are queueing to lend it money. The 10-year bund yield has hit a new low of -0.62% – meaning that investors are paying the government over six euros for every 1,000 for the privilege to lend money to Berlin.

Germany's economic malaise can be blamed on the global slowdown and falling demand from China. The world's second-largest economy has reported disappointing industrial output growth of 4.8% YoY in July – the lowest in over a decade. The Chinese slowdown is partly due to the trade war with the US – which has finally seen some good news.

The White House announced a delay of some new tariffs on Chinese imports from September 1st to December 15th – to ease the pain for US shoppers ahead of Christmas – in a U-turn from the dramatic imposition of duties less than two weeks ago. President Donald Trump had previously said that his levies policy hurts only China. His about-turn has boosted stocks and sent the dollar higher – as chances for a Fed rate cut have fallen.

Returning to the old continent, the Italian Senate is set to hold a vote of no-confidence on August 20th with prospects of new elections. However, politicians opposed to leading candidate Matteo Salvini's attempts to force an early vote are scrambling to prevent the government's collapse.

Italian politics will likely be on the back burner while speculation about a euro-zone recession and trade tensions remain in the spotlight. 

EUR/USD Technical Analysis

EUR/USD is struggling to stay away from critical support at 1.1160. The level is the confluence of the 200 Simple Moving Average on the four-hour chart and downtrend support that has accompanied the pair since early last week. EUR/USD has dropped below the 50 SMA – a bearish sign.

Further down, 1.1135 provided support in late July just before the plunge to hit a new 2019 low at 1.1027. 1.1110 and 1.1101 also provided support around that time and could slow a potential fall.

Looking up, 1.1200 is a round number that may curb any upside move. More significant support awaits at 1.1225 which held EUR/USD down on Tuesday. It is followed by 1.1250 which was is August's high point.