The German economy saw a slight contraction of 0.1% in the second quarter, which was expected. The ongoing manufacturing slump has been affecting the economy since last year. Despite this contraction, better fiscal prospects are improving Germany’s outlook as the largest economy in Europe. However, uncertainties like tariffs on the automobile industry add challenges for future economic balance.

German Q2 GDP and Volatility

The German Q2 GDP figure of -0.1% came in as anticipated, preventing an initial market shock. This indicates that the negative effects of the manufacturing decline were already considered in asset prices like the DAX index. We view this as a chance to sell some near-term volatility while the market processes news that was mostly expected. However, a broader view shows an economy divided. The July IFO Business Climate index rose slightly to 86.5, reflecting growing domestic confidence thanks to better fiscal prospects. Still, with inflation in Germany at 2.2% last month, the European Central Bank has limited options for further rate cuts after 2024. The main risk we are monitoring is the effect of US tariffs on the automobile sector. Data for the first half of 2025 revealed that German car exports to the United States dropped by 15% year-over-year. This makes companies like Volkswagen, Mercedes, and BMW very sensitive to news from upcoming trade talks in September.

Derivatives and Currency Outlook

For derivative traders, it’s wise to prepare for the fall. Buying protective put options on the DAX or an auto-sector ETF could be a good way to protect against negative outcomes from the trade talks. This serves as insurance for portfolios linked to German industrial performance. We observed a similar trend during the 2018-2019 trade disputes when uncertainty affected German industry for several quarters, while other sectors managed to hold up. The ongoing struggle in Europe’s largest economy is also putting pressure on the EUR/USD currency pair. Traders may be considering options that predict the euro will drop below the key support level of 1.05 if tariff issues escalate. Create your live VT Markets account and start trading now.

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