Euro hits fresh two-month lows amid weak Eurozone economic prospects, Fed hiking bets
- EUR/USD dives to fresh two-month lows below 1.1478, on track to a 0.9% weekly decline.
- The Dollar holds gains following a hawkish hold by the Fed on Wednesday.
- The IFO Institute anticipates weak growth and above-target inflation for Germany.
The enthusiasm about the US-Iran peace deal has been short-lived for the Euro (EUR), which broke two-month lows at 1.1478 against the US Dollar (USD) on Thursday. The EUR/USD pair has extended its reversal from Tuesday's highs above 1.1600 and is on track for a 0.9% weekly depreciation, hit by a mix of rising Federal Reserve (Fed) tightening bets and grim economic prospects for Germany.
The Fed left its benchmark rate in the 3.50%-3.75% range, in the first meeting chaired by Kevin Warsh on Wednesday, but the new central bank chief cleared any doubts about his commitment to bring inflation to the 2% target. The bank also removed references to an easing bias in a shortened monetary policy statement.
Fed officials acknowledged an improvement in economic activity and a stronger labour market, despite the uncertainty stemming from the Middle East conflict. In this context, nearly half of the committee members anticipate a rate hike before the year's end, according to the bank’s “Dot Plot”, which did not include Warsh’s forecasts. US Treasury yields jumped after the event, and the US Dollar appreciated against its main peers.
In the Eurozone, the German IFO institute confirmed the outlook of strong inflation and sluggish growth for the region’s major economy, adding pressure on the Euro. IFO forecasts show that German inflation is expected to average 2.9% this year and 2.7% in 2027, while the economy is seen growing 0.8% this year, unchanged from previous estimations, and another 0.8% in 2027, this one revised down 1.2%.
Eurozone data released on Thursday revealed that the Current Account surplus increased to EUR 15.7 billion in April, above the EUR 14.9 billion surplus seen in March, but well below the EUR 18.5 billion expected. Later on, Eurostat data showed that Construction Output slowed down to a 0.6% growth in April after an upwardly revised 1.7% increase in March.
German economy FAQs
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.
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.
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.
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.
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).
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
