Germany’s factory orders rose 1.9% in May, outpacing the 1.2% consensus, according to figures released on Monday by the Federal Statistics Office. That followed an April fall of 3.2%, which was revised up from a previously reported 3.8% decline.
On a year-on-year basis, factory orders climbed 6.2%, up from 2.1%, with the prior reading revised higher from 1.6%. In the currency market, the euro showed mild volatility around the release, while EUR/USD was last down 0.1% at about 1.1425, alongside a firmer US dollar.
—Eurozone Resilience and ECB Policy Outlook
Given the strong German factory orders from May, we see this as a sign that the Eurozone’s economic engine is holding up better than previously thought. This rebound challenges the narrative of a significant slowdown and suggests underlying resilience. Therefore, we should view recent weakness in the Euro as a potential buying opportunity.
This positive data point gives the European Central Bank more justification to maintain a firm policy stance. With the latest Eurozone core inflation figures from late June holding firm at 2.4%, the ECB is unlikely to signal any rate cuts soon. We anticipate that interest rate futures will need to price out any dovish sentiment for the coming months, which should support the Euro.
—Market Positioning and Strategy Considerations
We should look at the low market volatility as an opportunity to position for a potential rally in EUR/USD. The VSTOXX index, a measure of European equity volatility, has recently dipped to near 14, making options relatively inexpensive. Buying out-of-the-money EUR/USD call options with September expirations offers a low-cost way to gain upside exposure.
This view is further supported by last week’s German ZEW Economic Sentiment survey, which also beat expectations, indicating growing optimism among investors. Considering this, we see value in constructing bull call spreads on the EUR/USD, perhaps buying the 1.15 strike and selling the 1.17 strike, to target a measured move higher while defining our risk.
However, we must also consider the potential for US economic data to drive Dollar strength, which could cap any immediate Euro rally. For those with existing short Euro exposure, now is a good time to buy protective call options to hedge against a sharp reversal. This mirrors the pattern from 2023, where strong European data created choppy, two-way price action rather than a straight-line trend.
