26.05.202009:22 Forex Analysis & Reviews: EUR/USD: The new aid plan of Germany and France is not as effective as it might seem. The euro strengthened amid hopes for a quick recovery of the German economy.

The euro rose yesterday amid quite optimistic data on the eurozone economy. However, Germany's 1st quarter GDP is quite disappointing.

According to the data, the German economy shrank at the beginning of this year due to the coronavirus pandemic. The outbreak led to huge unemployment in the country, as well as paralyzed activity in many areas, such as production to services. A report published by the Federal Bureau of Statistics Destatis revealed that Germany's 1st quarter GDP decreased by 2.2% compared with the previous quarter, while compared with the 1st quarter of 2019, it decreased by 2.3%. The data fully coincided with the preliminary assessment so it did not cause significant changes in the market. The last major economic decline in Germany was recorded in the 1st quarter of 2009, to which the German GDP fell by 4.7%. However, the report for the 2nd quarter may have much worse indicators than in 2009.

A sharp drop in consumer spending was recorded. According to the data, expenses decreased by 3.2%, and company investments fell by 6.9%. The only thing that helped prevent a larger drop in GDP was the growth of government spending, which increased by 0.2%. Foreign trade also suffered during the pandemic. According to the report, exports decreased by 3.1%, while imports of goods and services decreased by 1.6%.

Meanwhile, traders viewed the business sentiment in Germany as positive, since the index improved significantly in May this year amid a significant increase in expectations in all sectors. It led to the strengthening of the euro, after the unsuccessful attempts of the bears to push the quotes to the support level of 1.0880.

The data published by the Ifo Institute for Economic Research revealed that business sentiment in Germany improved in May due to a significant increase in expectations. The index determined to 79.5 points, up from economists forecast of only 76.8 points. In April, the index was just 74.2 points. The index for expectations also increased from 69.4 points in April to 80.1 points in May, which also indicates the positive views of companies on their future after the pandemic. However, assessment of current conditions remained at low levels and even worsened slightly, with the corresponding index dropping to 78.9 points in May, against 79.4 points in April.

A rapid growth of the euro in the short term is not expected, especially if Germany, France and other northern countries manage to cope with their economic problems, while the southern countries fail to do so. The increasing debt of these states can escalate the fears that their debt will one day outweigh their ability to pay even with the support of the ECB, which can significantly affect their ratings, and discourage investors from investing, creating additional problems for the economies.

The adoption of France and Germany's proposal to create a new EU economic recovery fund will help partially alleviate this problem. However, there is no way to do it without seeking help from the ECB. Meanwhile, Netherlands, Austria, Sweden and Denmark are opposed to the creation of the said fund, and promised to make another proposal about it instead. Funds under the new proposal will most likely go to the restoration of eurozone economies, not to their salvation during the coronavirus pandemic.

As for the technical picture of the EUR/USD pair, the overall situation remained unchanged, different to the previous forecast. Focus will be at the support level 1.0885, since a breakout of which will increase pressure on the euro and update the lows 1.0850, returning the trading instrument to 1.0800. However, bulls have a chance to return the market to their control as long as they manage to push the quotes above the resistance level of 1.0930, the test of which will increase the demand for risky assets and lead to a larger bullish momentum and renewal of the previous week's highs near 1.0970 and 1.1010.