Euro remains depressed near yearly lows amid soft German data

The Euro (EUR) has trimmed some losses against the US Dollar (USD) on Wednesday but remains on the defensive, as data from the Eurozone fails to inspire, while France's ballooning debt starts to raise eyebrows. The EUR/USD has bounced up to 1.1350 after touching 16-month lows at 1.1312 on Tuesday, but is on track to its weakest monthly performance in more than a year, as the Federal Reserve's (Fed) hawkish repricing has boosted the USD across the board.

German unemployment figures have failed to provide any significant support to the Euro on Wednesday. Data released by the German Statistics Office has shown that the Unemployment Rate remained unchanged at 6.4% in August, but the number of jobless workers increased by 12K from 4K in July, more than twice the 5K growth anticipated by the market consensus.

Previously, German Retail Sales data revealed that consumption contracted for the second consecutive month in August, 0.4% down after a 2.5% decline in July. The year-on-year (Y-o-Y) reading has shown a 1.3% rebound, following a 3.4% fall in July, but below the 2% increase expected by the market. 

Also on Wednesday, preliminary Consumer Price Index (CPI) data from France revealed that inflation accelerated to a 3.4% yearly rate in September, from 2.6% in August, exceeding the 3% market consensus. Also in France, the Producer Price Index eased to 1% in August from 1.3% in July, while Consumer Spending contracted 0.5% in the same month, against expectations of a flat reading.

Concerns about France’s debt remain a significant weight for the Euro

Oil prices have given some respite to the Euro on Wednesday, allowing for a mild recovery, yet the growing concerns about France's ballooning debt are keeping Euro bulls subdued.

French public debt pile grew to EUR 3,596 trillion in June, reaching its highest level since 1946, at 119% of its Gross Domestic Product (GDP). The political gridlock rules out any convincing savings plan at least until next year's election, and meanwhile, the gap between the yields of French and German treasury bonds rises to 115 basis points, levels unseen since 2012, which has put markets on edge about the possibility of another credit crisis in the Euro Area.

ING Analysts note that EUR/USD fell below the summer lows on Tuesday as "dovish-leaning remarks by Christine Lagarde were leaving the euro in a more vulnerable position," although, in their opinion, the recent Euro selloff seems more Dollar-driven.

Looking ahead, however, ING experts see some relief for the Euro if the Fed fails to meet the market's hawkish bets: "We don’t expect another big break lower, as we still think the Fed will hike next only in December." However, they caution that "if US data is hot, the Fed hikes in October and stays hawkish, EUR/USD would be ready for another bearish leap, with risks potentially extending all the way to 1.10."