Euro picks up extra pace and revisits daily highs near 1.0750, looks at US data
|- The Euro gathers extra steam against the US Dollar.
- Stocks in Europe navigate a "sea of red" so far on Wednesday.
- EUR/USD appears to have met some contention near 1.0700 so far.
- The USD Index (DXY) shed some ground after recent peaks.
- The US ISM Services PMI will be in the limelight on Wednesday.
- Germany’s Factory Orders plunged 11.7% MoM in July.
- EMU Retail Sales contracted 0.2% MoM in July.
The Euro (EUR) accelerates its recovery vs. the US Dollar (USD) during the European afternoon on Wednesday, lifting EUR/USD to daily peaks near the 1.0750 region.
After advancing to fresh six-month tops just below the 105.00 figure in the previous session, the Greenback faces some selling pressure and recedes to the 104.80-104.70 band when tracked by the USD Index (DXY). The daily retracement in the index came in tandem with fresh weakness in US yields across different maturities.
In the meantime, steadfast confidence pervades the market with regards to the Federal Reserve's (Fed) resolution to cease its campaign of raising interest rates for the remainder of the year. At the same time, investors seem to be assuming that any interest rate reductions may not come until March 2024.
Conversely, the European Central Bank (ECB) finds itself traversing a landscape fraught with heightened uncertainty regarding the future trajectory of interest rates beyond the summer season. Market deliberations revolve around the notion of stagflation, amplifying the prevailing air of ambiguity.
In the euro docket, the Construction PMI in Germany improved marginally to 41.5 in August, and Factory Orders contracted markedly by 11.7% in July on month. In the euro bloc, Retail Sales contracted at a monthly 0.2% in July and 1.0% from a year earlier and the Construction PMI eased to 43.4 during last month.
In the US, Mortgage Applications tracked by MBA contracted 2.9% in the week to September 1. Later in the NA session, the IBD/TIPP Economic Optimism index, the Balance of Trade, the final S&P Global Services PMI for August, and the always-relevant ISM Services PMI are all due ahead of the speeches by Susan Collins (Boston Fed) and Lorie Logan (Dallas Fed).
Daily digest market movers: Euro extends the rebound on Dollar weakness
- The EUR's bounce against the USD gathers renewed traction midweek.
- US yields leave behind earlier gains and return to the negative territory.
- ECB’s Klaas Knot does not rule out another interest-rate raise.
- ECB'S Peter Kazimir advocated for a rate hike next week and a pause thereafter.
- Disinflation and cracks in the US labour market support the Fed’s pause.
- Markets continue to price in Fed rate cuts in Q2 2024.
Technical Analysis: Euro's risks remain tilted to the downside
EUR/USD has met some initial respite to the ongoing intense retracement around the 1.0700 region. However, the recent breakdown of the critical 200-day Simple Moving Average (SMA) at 1.0820 continues to favour extra losses in the short term.
If EUR/USD accelerates its losses, it could revisit the May 31 low of 1.0635 prior to the March 15 low of 1.0516. The loss of the latter could prompt a potential test of the 2023 low at 1.0481 seen on January 6.
On the upside, spot is expected to target the critical 200-day SMA at 1.0820. North from here, bulls should meet the the weekly top of 1.0945 from August 30 ahead of the interim 55-day SMA at 1.0953 and prior to the psychological 1.1000 barrier and the August 10 top at 1.1064. Once the latter is cleared, spot could challenge July 27 peak at 1.1149. If the pair surpasses this region, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 seen on July 18.
A sustained decline is likely in EUR/USD while it remains below the 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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