EUR: Germany giveth and Germany taketh

So far this year, the outlook for the EUR has become intertwined with that of the
Eurozone’s largest economy. Indeed, Germany is one of the biggest victims of the
energy crisis and the recent PMI and ifo releases have suggested that its slowing
economy is dragging the Eurozone into a recession. The soaring energy prices in
Europe further triggered a sharp loss of competitiveness of German exporters.
This, together with slowing global demand due in part to the recent weakness of
the Chinese economy, meant that there was also less EUR buying by exporters.
Germany has further tried to compensate for the sharp reduction of Russian gas
supplies by aggressively purchasing LNG (mostly sourced from the US) and this
boosted USD-buying by European importers. The outlook for the German economy
will remain a drag on the EUR in coming months. That being said, on the day, any
positive surprises from the German CPI data for September could herald similar
upside surprises from the Eurozone’s HICP inflation data tomorrow. In turn, this
could boost the credibility of the ECB’s hawkish message of late. This message is
likely to be reiterated by the more than a dozen Governing Council members today
(among them the ECB Chief Economist Philip Lane). In turn, this could help prop
up the EUR on the day.

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