EUR/USD: bleak German data drags the euro down

German factory orders and ZEW economic sentiment unexpectedly fell. The weaker than expected German data triggered a sharp drop in the euro pairs, shortly ahead of the FOMC minutes.

On Tuesday, for the first time in a long time, German economic data was disappointing. Industrial Orders and the ZEW Economic Sentiment indicator both fell in Germany, triggering a sharp decline in the common currency.

With the German economy being the largest in the Eurozone, the implications for the economic bloc are not positive. Therefore, the decline of the euro is seen as a concern, and it justifies the ECB's dovish attitude.

German factory orders and ZEW Economic Sentiment decline

Factory orders indicate new purchase orders placed with manufacturers. The market expected orders to rise by 0.8%, but in fact they fell sharply, by 3.8%, the lowest level since last July.

There is growing concern that German economic growth is stagnating, as factory orders are a leading indicator of production. The sharp decline raises serious questions about the strength of the country's economic recovery.

The bad data was compounded when the ZEW survey was released later in the trading day. The ZEW indicator of economic sentiment in Germany fell to 61.1 from a forecast of 80.

The ZEW survey is also a leading indicator of economic health, and the drop shows that optimism is declining in Germany. The market reacted immediately, sending EUR pairs lower.

Euro pairs down sharply on poor German data

Until the German data was released, the Euro pairs traded with a bid tone. EUR/USD, in particular, looked strong, trading near the 1.19 level. Similarly, EUR/JPY looked set to regain the 132 area.

But bad German data suddenly changed sentiment. Both EUR/USD and EUR/JPY lost about 100 pips as investors revised their forecasts for the common currency.

Going forward, market participants will be looking closely at future European data to determine if this is an isolated event or something else. If the poor data continues, the common currency will have a hard time recovering from its lows.