EUR/GBP – Germany on the brink of recession, UK consumer confidence improving

• German double-dip recession likely after 0.1% contraction in Q3
• UK consumer confidence improves but remains weak
• EURGBP appears to fail again near range high

German uncertainty weighing on the single currency

The euro is slipping against the pound at the end of the week with economic data highlighting the challenges facing the bloc.

Nowhere is that more evident than in Germany which appears to be on the brink of a double-dip recession and facing immense uncertainty over its budget for next year as it scrambles to patch up finances for this one.

A supplementary budget next week alongside a proposal to suspend the debt brake now looks likely but even this is just a temporary solution that won’t give investors much confidence in the outlook for an economy already under significant strain.

The economy was confirmed to have contracted by 0.1% in Q3 this morning and as we move into the final month of Q4, it’s looking likely data early next year will confirm the country is back in recession.

The Ifo business climate survey was a little better and appears to be turning a corner which is hopefully a good sign but at 87.3, it’s still printing figures near historical lows. The early months of the pandemic were understandably much worse, as you’d imagine, but that aside, recent readings have fallen close to 2001 and 2009 levels.

UK consumers buoyed by improving real earnings

UK consumer confidence is also gradually improving, albeit from very weak levels. At -24, the Gfk survey is 25 points from last September’s lows but still some way below all surveys from mid-2013 through to the pandemic. Still, the direction of travel is more promising and inflation is now running below wage growth which should continue to support that.

A big test of technical support

The euro has been struggling near range highs against the pound for a number of weeks but that now appears to be turning into some weakness in the pair.

EURGBP Daily

Source – OANDA on Trading View

Not only did it not break the range highs, it’s now trading at a more than two-week low and testing what could prove to be a key support level. The lower part of the rising channel coincides with the bottom of the 200/233-day simple moving average band.

A move below here could be viewed as a very bearish signal and would take the pair much deeper into correction territory. Arguably it could just reaffirm its position in a sideways channel, where it’s traded since May.

And based on the size of the rising channel which could be viewed as a slanted double top, a breakout could be seen as a sign of a much deeper correction to come.

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