In July 2025, Germany’s final services PMI was 50.6, slightly higher than the preliminary estimate of 50.1 and an increase from 49.7 the month before. The final composite PMI also came in at 50.6, above the previous 50.4. These numbers indicate a small recovery in the services sector. Inflation in Germany has dropped to its lowest level since early 2021. Costs in the services sector increased at the slowest pace since February 2021, which aligns with a reported slowdown in wage growth from the European Central Bank’s Wage Tracker. As a result, businesses raised their selling prices at the slowest rate since April 2021.

Business Activity Update

Business activity in the services sector picked up after three months of stagnation. For the first time since August 2024, new business in services showed an increase, even though backlogged orders decreased. Employment growth, which began earlier this year, has nearly stalled. The slight improvement in new orders and export business suggests that Germany’s economy is slowly recovering from a long period of weakness. However, this recovery remains fragile, with no signs of strong optimism in the services sector. The latest data shows a modest improvement in Germany’s economy, with both the services and manufacturing sectors entering a growth phase. This is the first clear sign that the economy is moving beyond the weaknesses seen since late 2024. This report is particularly important, following the confirmed -0.2% GDP contraction in the second quarter of this year. The key takeaway is the significant easing of inflation to its lowest point since early 2021. This aligns with recent Eurozone HICP data, which reported that headline inflation for July 2025 fell to 2.5%, getting closer to the central bank’s target. This data strongly indicates that disinflation is speeding up in Germany, the largest economy in the Eurozone. This shift changes our outlook on the European Central Bank’s next steps. We now expect a less aggressive ECB, as the reasons for further rate hikes are weakening. This suggests that interest rate futures, particularly those associated with ESTR, will indicate that borrowing costs are unlikely to rise further, and might even fall sooner than we previously thought.

Market Opportunities

For equity markets, the outlook for modest growth is supportive for the German DAX index. We believe this data can help the index gradually climb from the lows we saw at the end of 2024. Thus, using call option spreads on the DAX seems to be a sensible way to capture this potential upside while managing risk in what remains a fragile recovery. The mixed signals in the report, showing both growth and stalling employment, suggest that the market is likely to see slow increases rather than sharp rallies. The VSTOXX index, which measures Eurozone equity volatility, has been declining since its peak in early 2025 but is still higher than historical averages. We see an opportunity to take advantage of this elevated volatility by selling it, potentially using strategies like iron condors on the DAX, in a stable, range-bound market. Lastly, a less aggressive ECB creates a policy divergence from other central banks, like the U.S. Federal Reserve, which is maintaining rates due to more persistent domestic inflation. This difference is typically unfavorable for a currency. Therefore, we expect potential weakness in the Euro and will be looking at derivatives that could profit from a decline in the EUR/USD pair in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now