Euro sinks to the 1.0660 region after ECB rate hike, US data

  • The Euro now trades well on the defensive against the US Dollar.
  • Stocks in Europe now advance modestly on Thursday.
  • EUR/USD weakens to the 1.0660 zone post-ECB.
  • The USD Index (DXY) improves further north of 105.00.
  • The ECB hiked its Deposit Facility Rate by 25 bps to 4.00%.
  • US Producer Prices surprised to the upside in August.

Today marks the European Central Bank (ECB) Day. Following the bank's decision to raise interest rates by 25 bps, the Euro (EUR) experienced an acceleration in its decline against the US Dollar (USD), motivating EUR/USD to breach the key support at 1.0700 the figure on Thursday.

On the other hand, the Greenback managed to find renewed strength and reached new six-month highs around the 105.20 region, as indicated by the USD Index (DXY). This upward movement coincided with a decent bounce in US yields across different timeframes.

In terms of monetary policy, investors are foreseeing the potential for interest rate cuts by the Federal Reserve (Fed) to take place at some point in the second quarter of 2024.

Shifting our attention to the ECB, the bank's latest projections indicate that the region's economy is expected to grow by 0.7% this year and 1.0% in 2024. Additionally, the bank has revised its inflation forecasts, anticipating a 5.6% increase in prices in 2023. The statement suggests that the current interest rates are deemed appropriate for an extended period, with the objective of timely achieving the bank's inflation target.

In terms of data, in the US, the Producer Price Index (PPI) recorded a 0.7% MoM increase in August and a 1.6% increase compared to the same period last year. Retail Sales expanded by 0.6% on a monthly basis in the previous month, and Initial Jobless Claims rose by 220K in the week ending September 9.

Daily digest market movers: Euro loses the grip on dovish ECB, strong US data

  • The EUR drops well south of 1.0700 against the USD.
  • US yields attempt a decenty rebound so far.
  • Investors now look at Lagarde's press conference.
  • Australia released an upbeat jobs report.
  • Markets keep factoring in potential rate cuts by the Fed in Q2 2024.
  • US PPI, Retail Sales came in on the strong side.

Technical Analysis: Euro approaches the 1.0630 region

EUR/USD's selling pressure gathers extra steam following the breakdown of the key support at 1.0700 on Thursday.

Should EUR/USD successfully break below its September 7 low at 1.0685, the pair may enter a phase of retesting the May 31 low at 1.0635 before potentially reaching the March 15 low at 1.0516. If this last level is breached, it could initiate a possible examination of the 2023 low at 1.0481 seen on January 6.

On the upside, the primary focus lies on targeting the crucial 200-day Simple Moving Average (SMA) at 1.0827. If the pair surpasses this level, a bullish momentum might ensue, leading to a challenge of the peak at 1.0945 seen on August 30. This upward movement could be further supported by the provisional 55-day SMA at 1.0932. Subsequently, this scenario could pave the way for an advance towards the psychological level of 1.1000 and the August high at 1.1064 from August 10. If the spot clears this area, it could alleviate some of the bearish pressure and potentially aim for the July 27 top at 1.1149, followed by the 2023 high at 1.1275.

As long as the EUR/USD remains below the 200-day SMA, there remains a possibility of a sustained decline in the pair.

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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