EUR/USD plunges as “frugal four” threatens Merkel-Macron financing deal

EUR/USD plunges as “frugal four” threatens Merkel-Macron financing deal
  • The EUR/USD pair declined after a report showed that German sunk into a recession in Q1.
  • The economy contracted by 2.2% in the first quarter due to weak machinery investment and private consumption
  • The euro also reacted to differences between southern and northern states on post-coronavirus financing

The EUR/USD pair declined by more than 20 basis points after Germany released disappointing first-quarter economic data. The pair also fell as the market reacted to the “frugal four” opposition of the Macron and Merkel deal.

EUR/USD falls
EUR/USD plunges after weak German data and EU differences

Germany economy contracts in the first quarter

The coronavirus pandemic pushed Germany into its worst recession in more than a decade in the first quarter. That led to a slight decline of the EUR/USD pair.

According to the statistics office, the economy contracted by 2.2 per cent in the first quarter. That was a bigger quarter than the contraction of 0.1 per cent in the fourth quarter of last year. It was also worst performance since the 4.7 per cent contraction in the first quarter of 2009.

The economy contracted by 1.9 per cent year on year, in line with consensus estimates.

In a statement, the office said that the economy was robust in the first two months of the quarter. It then shrunk as the country started to shut down as it reacted to the pandemic.

A few factors contributed to the contraction in the quarter. Capital investments in machinery and equipment declined 6.9 per cent. That was offset by a general capital expenditure by the government, which rose by about 0.2 per cent.

As the coronavirus pandemic spread, many people in Germany spent less. The private consumption declined by 3.2 per cent while exports declined by 3.1 per cent. The decrease in exports was partially offset by a 0.7 per cent increase in services exports.

Other metrics of the economy like employment and domestic and foreign demand declined also. In a statement, the department said:

“There was much less domestic and foreign demand also in comparison with a year earlier. Gross fixed capital formation in machinery and equipment fell sharply (-9.2%). Household final consumption expenditure dropped a price-adjusted 2.2% on a year earlier.”

EUR/USD reacts to financing differences

Another major contributor to the EUR/USD performance was the diverging views on eurozone post-coronavirus financing.

Two weeks ago, investors rejoiced when Angela Merkel and Emmanuel Macron agreed on a financing agreement worth more than $540 billion. The financing breakthrough came after serious negotiations between the two most-powerful countries in the bloc.

According to the agreement, the worst-affected countries would receive this funding as grants. Germany, as the biggest contributor to the European Commission budget, would shoulder most of the burden.

Now, a team of countries christened as the “frugal four” have rejected the deal. Austria, Denmark, Netherlands, and Sweden have outlined a different vision of the financing. Instead of grants, the countries have insisted on giving the southern countries low-interest loans.

Southern countries like Spain and Italy have rejected a deal that will include loans. The highly indebted countries have said that loans will worsen their financial situation.

They outlined this vision a few days ahead an important speech by Ursula von der Leyen, the European Commission president. On Wednesday, she will present a 2,000-page proposal on how she will harness the EU budget in the coronavirus fight.

EUR/USD technical outlook

EUR/USD
EUR/USD forecast

The EUR/USD pair is trading at 1.0876, which is the lowest it has been since May 18. On the four-hour chart, the price is below the 50-day and 100-day exponential moving averages and slightly below the 38.2% Fibonacci retracement level. The RSI has also moved at the lowest level since May 14. Therefore, the pair may continue falling as bears remain in control. If it does, it will test the important 1.0850 level.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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