Although Germany's economy shrank in the second quarter more sharply than initially estimated, the euro ignored the data and even recovered slightly ahead of the summer's most significant event — the Jackson Hole symposium.

The contraction in German GDP was driven by significantly weaker industrial performance following a sharp increase in U.S. business activity earlier this year aimed at offsetting tariffs.

According to the report, Germany's gross domestic product fell by 0.3% compared with the previous three months. Investment also had a notable negative impact, dropping 1.4%, while private consumption provided much less support than initially anticipated. This news has certainly raised concerns in economic circles, as Germany is traditionally the locomotive of the European economy. Even a modest GDP decline signals slowing growth and could foreshadow more serious problems ahead.

As I noted earlier, the reasons for Germany's GDP drop are clear. A combination of geopolitical tensions, the trade crisis, and inflation negatively affected business activity and consumer sentiment. U.S. tariffs substantially increased production costs, reducing the competitiveness of German companies in the global market. Moreover, the decline in investment reflects uncertainty about future prospects and a reluctance among businesses to take risks under current conditions. Weak support from private consumption is also a troubling sign.

"Industrial output performed worse than initially assumed, and Germany's overall production shrank more in the second quarter than previously estimated," the statistics agency said in a statement.

The contraction dealt a serious blow to Europe's largest economy, dashing hopes for a swift exit from its two-year recession. GDP rose 0.3% in the first three months of 2025, but that was partly due to front-loaded exports to the U.S.

In July, the European Union reached an agreement with President Donald Trump under which most shipments from the region will be subject to 15% tariffs. The deal was sharply criticized by German industry. The economy is also suffering from weak global growth, geopolitical uncertainty, and long-standing issues such as an aging workforce and excessive bureaucracy.

In its monthly report on Thursday, the Bundesbank warned that GDP may fail to grow again in the third quarter, with stagnation the most likely outcome. At the same time, the new government's plans to significantly boost defense and infrastructure spending provide a measure of optimism, with results likely to become visible in 2026.

Technical outlook for EUR/USD: Buyers now need to regain the 1.1600 level. Only then will a move toward testing 1.1630 be possible. From there, the pair could climb to 1.1658, though doing so without support from large players will be rather difficult. The most distant target is the 1.1690 high. If the instrument declines, I expect significant buyer activity only around 1.1565. If no major demand appears there, it would be better to wait for a retest of the 1.1530 low or consider opening long positions from 1.1490.

Technical outlook for GBP/USD: Pound buyers need to take the nearest resistance at 1.3420. Only this will open the way toward 1.3450, above which breaking through will be rather difficult. The most distant target is the 1.3480 level. If the pair falls, bears will try to take control of 1.3380. Should they succeed, a breakout of this range would seriously damage the bulls' positions and push GBP/USD down to the 1.3346 low, with prospects of extending toward 1.3305.