According to the Federal Labour Office, the German unemployment rate rose unexpectedly to 7.6% in December from 7.5% in seasonally adjusted terms. Expectations had called for no change in the jobless rate, which had remained at 7.5% since September 2008.

The labour office also reported that the number of those seeking employment increased by 18,000, undoing the 10,000 fall recorded in the previous month and bringing the seasonally adjusted total number of jobless claims to 3.181 million, 3.102 million in non-seasonally adjusted terms. The consensus had been for a 10,000 increase in the number of German unemployed persons.

"December's rise in German unemployment confirms that the downturn in

wider economic activity has finally hit the labour market," Capital Economics European economist Jennifer McKeown said, noting the first increase in the number of jobless persons in nearly three years.

Furthermore, taking her cue from survey indicators suggesting that hiring intentions were falling, McKeown added that the jobless rate in Germany could rise towards 10% before the end of 2009.

"Unfortunately, this deterioration looks set to offset the positive impact of falling inflation on households' real incomes," McKeown said. "With consumer spending remaining very weak and industry hit hard by weakening global demand, we now see German GDP falling by around 2% this year."

Echoing McKeown's comments, ING Wholesale Banking senior economist Carsten Brzeski wrote that December's figures show that the positive effects of the past economic upswing have ended.

"For the last five years, the impressive developments on the labour market have been the bright spot of the economy," Brzeski noted. "Structural reforms and strong economic growth helped to lower the numbers of jobless in Germany from more than 5 million to less than 3 million."

However, the economist also said that the labour market will likely weather the economic slowdown better than it has previously.

"One thing is for sure: the worst economic recession since WWII will not leave the labour market unaffected. Unemployment will increase," Brzeski said. "But by how much is still open for discussion."

A euro rally has replaced an early-year sell-off on Wednesday despite the release of a soft German unemployment report.

The euro is up 0.0093 to 1.3630 against the dollar. After initially ticking down to 1.3463 on the 2 a.m. EST data, the euro proceeded to immediately rebound to current levels.

Similarly, the euro fell 0.0012 to session lows of 0.9028 against the pound sterling on the data before rising to current levels, up 0.0046 to 0.9120 during the session.

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