The Euro (EUR) is trading defensively on Wednesday, down 0.3% against the US Dollar (USD), following a sharper-than-expected drop in German industrial production, according to FX strategists Shaun Osborne and Eric Theoret at Scotiabank.
Fundamentals Drive EUR Lower as German Data Disappoints
Germany’s industrial production fell by 4.3% in August, significantly worse than forecasts, triggering renewed pressure on the Euro. The data has contributed to a slight softening in European Central Bank (ECB) rate expectations, signaling a shift in EUR drivers from sentiment-based concerns to more fundamental economic weakness.
“The shift is welcome,” Scotiabank notes, “as recent EUR declines had largely been driven by political instability in France rather than macro data.”
French Political Uncertainty Eases, but Risks Persist
While outgoing French Prime Minister Lecornu has made limited progress in forming a new coalition, markets appear somewhat reassured. The France–Germany 10-year bond yield spread has narrowed notably, reflecting a modest calming of investor nerves.
Options Market Still Bearish on Euro
EUR risk reversals remain weak, with the options market still favoring downside protection. There’s now a slight premium for EUR puts over calls, signaling ongoing investor caution despite reduced political volatility.
Outlook:
With fundamentals like German industrial data taking the lead in driving EUR sentiment, and ECB rate hike expectations softening, the Euro may continue to face headwinds in the short term — particularly if economic data continues to disappoint.
