Euro surrenders initial gains and retreats below 1.1200
|- Euro now reverses the initial advance and turns negative against the US Dollar.
- Stocks in Europe extend the daily gains on Thursday.
- Producer Prices in Germany surprised to the upside in June.
- US weekly Initial Jobless Claims rose less than expected.
The Euro (EUR) now fades the initial optimism against the US Dollar (USD) and forces EUR/USD to slip back below the 1.1200 level, as the risk complex comes under further pressure.
In the meantime, the US Dollar Index (DXY) extends further its recovery and reaches new weekly peaks past the 100.50 level helped by extra strength in US yields across all maturities.
Going forward, the pair is expected to consolidate in a tight range ahead of key central bank meetings next week from the Federal Reserve and the European Central Bank (ECB). While both central banks are widely expected to raise rates by a quarter point, there is an incipient divergence in their near-term policy outlooks.
That said, the Fed is perceived as nearing the end of its tightening cycle, while ECB officials have sounded less hawkish recently on the prospect of further hikes beyond the summer.
In Eurozone data, German Producer Prices contracted 0.3% MoM in June and rose 0.1% YoY. Additionally, the euro area's Current Account surplus widened to €9.1B in May. Later in the session, the European Commission will publish its preliminary gauge of July Consumer Confidence.
In the US, the usual weekly Initial Jobless Claims rose by 228K in the week to July 15 and the Philadelphia Fed Manufacturing Index improved marginally to -13.5 for the current month. Later in the session, the CB Leading Index and Existing Home Sales will close the daily calendar.
Daily digest market movers: Euro remains unable to regain upside traction
- The EUR comes under pressure and challenges recent lows against the USD.
- Germany’s Producer Prices came in on the strong side in June.
- The USD Index clings to gains beyond the 100.00 barrier.
- Speculation that the Fed’s July hike could be the last one runs high.
- US, German yields attempt a tepid bounce so far.
- The PBoC kept lending rates unchanged.
- Australian jobs report surprised to the upside in June.
Technical Analysis: Euro faces solid contention around 1.1000
EUR/USD seems to have settled in a consolidative fashion around 1.1200 following recent overbought levels.
The pair printed a new 2023 high at 1.1275 on July 18. Once this level is cleared, there are no resistance levels of significance until the 2022 peak of 1.1495 recorded on February 10.
On the downside, there is a minor support at the weekly low at 1.1174 on Wednesday prior to the psychological 1.1000 mark, all seconded by provisional support at the 55-day and 100-day Simple Moving Averages at 1.0896 and 1.0877, respectively, ahead of the July 6 low of 1.0833. The breakdown of this region should meet the next contention area at the key 200-day SMA at 1.0681 prior to the May 31 low of 1.0635. South from here emerges the March 15 low of 1.0516 before the 2023 low of 1.0481 on January 6.
The constructive view of EUR/USD appears unchanged as long as the pair trades above the key 200-day SMA.
German economy FAQs
What is the effect of the German Economy on the Euro?
The German economy has a significant impact on the Euro due to its status as the largest economy within the Eurozone. Germany's economic performance, its GDP, employment, and inflation, can greatly influence the overall stability and confidence in the Euro. As Germany's economy strengthens, it can bolster the Euro's value, while the opposite is true if it weakens. Overall, the German economy plays a crucial role in shaping the Euro's strength and perception in global markets.
What is the political role of Germany within the Eurozone?
Germany is the largest economy in the Eurozone and therefore an influential actor in the region. During the Eurozone sovereign debt crisis in 2009-12, Germany was pivotal in setting up various stability funds to bail out debtor countries. It took a leadership role in the implementation of the 'Fiscal Compact' following the crisis – a set of more stringent rules to manage member states’ finances and punish ‘debt sinners’. Germany spearheaded a culture of ‘Financial Stability’ and the German economic model has been widely used as a blueprint for economic growth by fellow Eurozone members.
What are German Bunds?
Bunds are bonds issued by the German government. Like all bonds they pay holders a regular interest payment, or coupon, followed by the full value of the loan, or principal, at maturity. Because Germany has the largest economy in the Eurozone, Bunds are used as a benchmark for other European government bonds. Long-term Bunds are viewed as a solid, risk-free investment as they are backed by the full faith and credit of the German nation. For this reason they are treated as a safe-haven by investors – gaining in value in times of crisis, whilst falling during periods of prosperity.
What are German Bund Yields?
German Bund Yields measure the annual return an investor can expect from holding German government bonds, or Bunds. Like other bonds, Bunds pay holders interest at regular intervals, called the ‘coupon’, followed by the full value of the bond at maturity. Whilst the coupon is fixed, the Yield varies as it takes into account changes in the bond's price, and it is therefore considered a more accurate reflection of return. A decline in the bund's price raises the coupon as a percentage of the loan, resulting in a higher Yield and vice versa for a rise. This explains why Bund Yields move inversely to prices.
What is the Bundesbank?
The Bundesbank is the central bank of Germany. It plays a key role in implementing monetary policy within Germany, and central banks in the region more broadly. Its goal is price stability, or keeping inflation low and predictable. It is responsible for ensuring the smooth operation of payment systems in Germany and participates in the oversight of financial institutions. The Bundesbank has a reputation for being conservative, prioritizing the fight against inflation over economic growth. It has been influential in the setup and policy of the European Central Bank (ECB).
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