German PMI Preview: From bad to worse? EUR/USD is ready for another fall


  • Prospects for Germany's economy have likely remained grim in August.
  • The ECB is watching the survey data ahead of its next decision.
  • FXStreet's Surprise Index is pointing to a disappointing outcome that may weigh on EUR/USD.

A car cannot accelerate without a strong engine, and a train is unable to advance if its front car is derailing. Germany – the "locomotive" of the euro-zone – contracted in the second quarter. Markit's forward-looking Purchasing Managers' Indexes (PMIs) will likely show unflattering conditions in August. And this may raise fears of an outright recession in the continent's largest economy. 

The preliminary version of the survey for August is expected to be similar to that in July. The initial focus will be on France's manufacturing PMI – which has slipped below the 50-point threshold, separating expansion from contraction. A still-growing services sector is expected to maintain the calm.

Euro zone pmi calendar data August 2019

Why German manufacturing is critical for the euro's value

The focus quickly shifts to the German figures – and especially the manufacturing PMI. Contrary to many other developed economies, Germany leans heavily toward production and exports. The nation's high trade balance surplus is the lion's share of the euro zone's positive balance – and one of the reasons the euro has held up. The common currency has not collapsed despite signs of a slowdown and the European Central Bank's willingness to introduce more monetary stimulus.

In other words, speculation is pushing the common currency lower, but exporters keep its bid. 

Yet when the German industrial export machine stutters – the euro struggles – and so do other European economies. Cross-border supply chains create a dependency on the largest economy. 

German manufacturing PMI leading to August 2019

Markit's manufacturing PMI has been below 50 since the beginning of the year, hitting 43.2 points in the final read for July. Economists now expect a score of 43 points – even lower.

Expectations and scenarios

1) Above expectations: As a gloomy number is already forecast, EUR/USD may have room to rise if the outcome exceeds these downbeat projections. Such a market reaction is always possible when estimates are low and cannot be ruled out at this juncture.

Nevertheless, the upside surprise will need to be substantial – closer to 50 than to 43 – to trigger hope for a revival and for the euro to turn its fate.

2) Within expectations: If estimates are correct, the reaction may depend on the services PMI. It scored a healthy 54.5 points in July, and a minor drop to 54 is expected. That would keep the composite figure above 50. If the services figure beats, there is room for a minor uptick.

If prospects for that sector fall – and especially if the composite PMI is dragged below 50 – EUR/USD may edge lower.

3) Below expectations: A disappointment cannot be ruled out even if projections are modest. In this case, EUR/USD has room to fall, as markets may price in an even more aggressive easing from ECB President Mario Draghi and his colleagues.

But what are the chances of setting a new low – the worst since 2009?

We turn to FXStreet's Surprise Index and find that this option has significant chances.

FXStreet Surprise Index quantifies, in terms of standard deviations of data surprises (actual releases vs. survey median), the extent to which economic indicators exceed or fall short of consensus estimates.

Examining top-tier and medium-tier figures since 2011, we can see a clear downtrend since the index peaked in early 2014. Moreover, a downtrend support line that accompanied the indicator since mid-2018 has been sharply broken to the downside recently. A downside surprise is more likely than an upside one.

German FXStreet surprise index long term ahead of Manufacturing PMI August 2019

Taking a closer look at data from early 2018 onwards reveals a similar picture. The surprise index peaked at the beginning of 2019. It has since broken below an uptrend support line that accompanied it since around February. However, it is still holding above another line that dates back to the spring of 2018.

The glimmer of hope arising from the longer-term support line implies that a downside surprise may be relatively moderate.

Nevertheless, FXStreets's Surprise Index is generally pointing to a downside surprise – and that may bring the euro down.

Conclusion

Markit's preliminary PMIs and especially the German manufacturing one may have a significant impact on the euro. Low expectations may result in an easy path for a beat, but FXStreet's Surprise Index points to another disappointment. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

Analysis feed

Latest Forex Analysis

Editors’ Picks

EUR/USD: Mildly bid, but bull reversal remains elusive

EUR/USD is currently trading at 1.1078, representing marginal gains on the day amid oil price spike. The currency pair on Friday faced rejection at the resistance of the trendline connecting June 25 and Aug. 13 highs.

EUR/USD News

GBP/USD: Brexit optimism keeps bulls in the drivers’ seat

The GBP/USD pair has advanced for a second consecutive week, reaching Friday 1.2505, its highest since last July, and settling not far below this last. Fading odds for a hard-Brexit continue to underpin the Pound.

GBP/USD News

USD/JPY looking to close the bearish opening gap amid risk-off

USD/JPY gapped down to 107.44 on Monday’s open as risk appetite is diminished following the attack on Saudi Arabian oil facilities. The spot now trades near 107.80, aiming to close the bearish opening gap ahead of a big week. 

USD/JPY News

The good, the bad and the extremely ugly crypto

XRP is in a borderline situation and with little room for doubt. Bitcoin demonstrates its power and positions itself as the emerging leader. Ethereum is in an intermediate situation, far from risk but also from opportunity.

Read more

Gold prices shot higher by over 1% in risk-off start to the week

Gold prices have shot higher in the open this week due to the increased tensions in the Middle East following the attack on Saudi Arabia’s oil and gas facilities in Abqaiq which has suspended half of the kingdom’s processing.

Gold News

Forex Majors

Cryptocurrencies

Signatures