Euro dips further as grim German data adds to political uncertainty and debt issues

The Euro (EUR) keeps heading lower against a firmer US Dollar (USD) on Tuesday, as growing political uncertainty and a deteriorating fiscal outlook have renewed fears of debt contagion in the region. German Factory Orders have failed to provide significant support, pushing the EURUSD pair toward the 1.1200 level after a mild recovery attempt, which it was capped just below 1.1230 earlier in the day.

Data released by Destatis on Tuesday revealed that new orders for products manufactured in Germany plunged 10.6% in August, following a 3.2% increase in July, largely exceeding the 1% decline seen in the previous month. Year-over-year, factory Orders grew 2.7%, down from a 14% increase in the previous month.

The report highlights the decline in sales of transport equipment, such as aircraft, ships, trains and military vehicles,  which fell 61% on seasonally adjusted terms after having doubled in July, as the main reason for August's figures. Excluding large-scale orders, sales of all other items declined a mere 0.1%.

Growing debt concerns and political uncertainty hurt the Euro

The Euro remains under pressure amid rising concerns about public fnances, with the gap between France’s OAT yield and the German Bund at levels unseen since the 2009 financial crisis. France is also facing a political gridlock that discards any significant savings plan, at least until the presidential elections in 2027, and to make things worse, Spanish President Pedro Sanchez announced a snap election in November. If we add to this the fragility of Frederich Merz's cabinet in Germany, we obtain the picture of the uncertain political scenario that keeps investors away from the Euro.

Oil prices, another key source of Euro weakness, have pulled back from highs, providing some relief. Brent Oil retreated below the key $100 per barrel on Monday, which allowed the EUR/USD to regain the 1.1200 level. Reports from the Middle East reveal that the amount of Oil traffic through the Strait of Hormuz has increased considerably, but prices are still more than 25% above August's lows, with the US-Iran war in a grey area and with prospects of a peace deal still far off.

The European Central Bank (ECB) remains between a rock and a hard place, having to fine-tune its monetary policy. Further monetary tightening might add fuel to the government bonds sell-off. Inflation, on the other hand, is running at levels well above the 2% target and does not seem to retreat unless the Middle East improves radically, which adds a layer of uncertainty to the Eurozone's economic outcome.

In the US, ISM Services Purchasing Managers Index data released on Monday showed that business activity slowed down beyond expectations in September, as prices paid by businesses increase with demand still at high levels. The US Dollar, however, remains drawing support from the high US Treasury yields, which hit fresh multi-decade highs.