EUR/USD: German industry isn't out of the woods yet

Consolidation continues on the EUR/USD pair, in a rather cautious environment for major risk asset classes at the very start of the year, hovering near $1.1720 per euro.

Forex traders have just learned of the release of the final PMI data. In the Eurozone, the composite index, which measures private sector activity in manufacturing and services, came in at 50.6 in December after 47.7 in November. A reading of 50 marks the boundary between contraction and expansion. The final data for manufacturing alone was somewhat disappointing, at 48.9 compared to the initial estimate of 49.1.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, offered the following additional insights:

"With the exception of a few brief periods of improvement, the eurozone manufacturing sector has remained mired in recession since mid-2022. While the past year offered a glimpse of the possibility of a return to growth, the anticipated turnaround did not materialise. In fact, despite a great slowdown in the contraction, the industry has been unable to find its way back to expansion. However, 2026 could be the year of recovery for the sector. Indeed, the German government's economic stimulus package and increased investment in the European defense industry could inject new momentum into the entire sector. This hope appears to be shared by many companies, as evidenced by the strengthening confidence among eurozone manufacturers (compared to an already high level) regarding increased production over the next twelve months."

The foreign exchange market is operating in an environment dominated by the close scrutiny of the minutes of the US Federal Reserve, published at the very end of the year. The minutes constitute a chronological record (hence their name) of the internal debates of the last Federal Open Market Committee (FOMC) meeting.

These discussions confirm a profound heterogeneity of positions within the FOMC, both on the pace and the magnitude of future monetary adjustments. While a majority of officials remain in favour of further rate cuts in 2026, these remain strictly contingent on a more convincing slowdown in inflation, while a significant number of members advocate for a prolonged period of maintaining the status quo in order to assess the cumulative effects of the easing already undertaken.

The minutes also highlight a more technical but crucial aspect for money markets: the decision to initiate purchases of short-term Treasury securities to stabilize the level of bank reserves. The Fed's staff determined that these reserves had returned to the so-called "ample" range, a threshold deemed necessary to ensure smooth control of short-term interest rates. Officials emphasized the strictly operational nature of these purchases, intended to guarantee the proper functioning of the money market and without any impact on the direction of monetary policy. Jerome Powell had also used this terminology during his press conference, highlighting the distinction between reserve management and macroeconomic stimulus.

This internal debate was reflected in the December decision, marked by a 25 basis point cut in the key interest rate, bringing it down to a range of 3.50% to 3.75%, despite several dissenting votes. The minutes reveal that even some who supported the cut considered the decision "finely balanced," while others worried about the possibility of inflation becoming entrenched above the 2% target. The Fed thus acknowledges facing a double risk asymmetry: persistently high inflation on the one hand, and a labor market showing gradual signs of slowing on the other. In this context, the future trajectory of interest rates remains explicitly dependent on upcoming data.

In the EU, budget discussions on both sides of the Alps continue to fuel debate among currency traders.

"In France, Parliament unanimously adopted the special bill, the objective of which is to provide the country with a budget as early as January, with the deficit kept below 5% of GDP. This measure, which automatically extends the 2025 balances, echoes the situation in Spain, where political fragmentation leads to the extension of the 2023 budget, sometimes without even presenting a new proposal. Having a majority, however, does not guarantee a smooth budgetary process," explains Romane Ballin, bond manager at Auris Gestion.