- The narrowing of the Germany Manufacturing PMI to U.S. ISM Services PMI spread suggests that Germany’s growth prospects have improved relative to those of the US.
- The preliminary April data from the University of Michigan’s Consumer Sentiment survey has heightened concerns about stagflation in the U.S.
- EUR/USD rallied to a 52-week high and may have kick-started a multi-month impulsive up move sequence.
This is a follow-up analysis of our prior publication, “EUR/USD Outlook: Germany’s fiscal bazooka ignites Euro bulls, but a minor pullback is imminent as ECB looms” dated 5 March 2025.
Since our last analysis, the price actions of the EUR/USD have rallied towards 1.0940 on 17 March before it staged the expected minor corrective pull-back to retest the key 200-day moving average acting as a support at 1.0730 (printed an intraday low of 1.0733 on 27 March) as highlighted.
Thereafter, the EUR/USD resumed its bullish impulsive up move sequence with a rally of 6.9% to hit a 52-week high of 1.1474 on last Friday, 11 April, on the backdrop of the uncertainty surrounding the implementation of US reciprocal and sectoral-based trade tariffs.
US dollar confidence eroded due to rising stagflation risk
Fig 1: Germany Manufacturing PMI/US ISM Services PMI ratio with EUR/USD as of 14 Apr 2025 (Source: MacroMicro)
Fig 2: University of Michigan consumer sentiment with inflation expectations as of Apr 2025 (Source: TradingView)
Following the victory of the centre-right CDU/CSU in Germany’s federal election on February 23, and with newly appointed Chancellor Friedrich Merz proposing aggressive fiscal policies aimed at boosting infrastructure and defence spending, business sentiment in Germany’s key manufacturing sector has improved notably. This uptick contrasts with a decline in confidence within the U.S. services sector, an essential pillar of the American economy.
Reflecting this shift, the spread between Germany’s Manufacturing PMI and the U.S. ISM Services PMI narrowed to -2.5 in March, from -7.0 in February, highlighting a relative improvement in German economic momentum (see Fig 1)
Meanwhile, consumer confidence in the U.S, a leading indicator of future retail spending—has continued to deteriorate. According to preliminary data from the University of Michigan, sentiment fell for the fourth consecutive month, dropping to 50.8 in April from 57 in March. This marks the lowest reading since June 2022.
Adding to concerns, inflation expectations among U.S. consumers have surged. One-year-ahead inflation expectations jumped to 6.7% in April, the highest since November 1981 from 5.0% in March. Long-term five-year expectations also climbed to 4.4%, the highest since June 1991, up from 4.1% in the previous month (see Fig 2)
This combination of slowing growth and persistent inflation—hallmarks of a stagflation environment, poses a significant challenge for the U.S. Federal Reserve, which may find it increasingly difficult to implement counter-cyclical monetary policies to support the economy.
As a result, global investors may begin to question the “U.S. exceptionalism” narrative that has underpinned markets over the past five years. A shift in sentiment could prompt a reallocation away from U.S. fixed income and risk assets, potentially triggering a sustained weakening trend in the U.S. dollar.
Start of a multi-month bullish impulsive up move for EUR/USD
Fig 3: EUR/USD medium-term & major trends as of 14 Apr 2025 (Source: TradingView)
The recent strong up move seen in the EUR/USD on last Friday, 11 April, where it has staged a daily and weekly close above a former long-term secular descending channel resistance from its July 2008 major swing high.
In addition, the significant rebound sequence has occurred after a retest on the key 200-day moving average on 27 March, which suggests a major bullish breakout has occurred on the EUR/USD (see Fig 3).
Watch the 1.1050/1.0940 key medium-term pivotal resistance where a potential multi-month impulsive up move sequence may unfold for the EUR/USD for the next medium-term resistances to come in at 1.1715/1.1755, and 1.1910 in the first step.
However, a breakdown below 1.0940 negates the bullish tone to expose the major supports at 1.0730 (intersection point of the 50-day and 200-day moving averages), and 1.0600.
