- The US Dollar turns green in a headline flood of geopolitical news this Monday.
- In Germany, the far-right AfD party cannot book enough seats to claim the lead.
- The US Dollar Index (DXY) has recovered initial losses and trades marginally higher at the time of writing.
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, has completely recovered from its downbeat performance in Asia this Monday. The initial move down in the US Dollar came in, due to euphoria for the Euro (EUR) after the first German election results showed a firm lead for the Christian Democratic Union of Germany (CDU), which will take the lead in forming a coalition. As the dust settles, this means that fundamentally, no big changes will take place in Germany regarding leadership and political agenda, which triggers the Euro to pare back gains and the DXY to turn flat to positive.
Meanwhile US headlines have been added where several US departments such as the Pentagon have asked employees not to go ahead with the request from Elon Musk and DOGE (Department of Government Efficiency) to disclose their duties. Elon Musk meanwhile issued warnings on Twitter that those who fail to comply coming into the office or reporting back to DOGE, will be put on leave.
In an ongoing G7 meeting, the group is unable to agree on a joint statement to mark the three year since Russia invaded Ukraine, due to disagreements between the US and its European allies. The US opposed language condemning Moscow and a call for more energy sanctions, and has threatened to pull support for a statement altogether, although discussions are ongoing.
The US economic calendar starts off the week slowly, with all eyes on the US Gross Domestic Product (GDP) release for the fourth quarter of 2024 on Thursday and Personal Consumption Expenditures (PCE) for January on Friday. However, the Chicago Fed National Activity Index for January is due this Monday. Later in the day, United States (US) President Donald Trump is also due to deliver a speech.
Daily digest market movers: Euphoria fading
- The Euro (EUR) has given up all its gains against the US Dollar (USD) as traders are not impressed with the possible lack of major reforms or changes in the German political landscape for the new government formation.
- The Chicago Fed National Activity Index for January came in at -0.03, a small loss compared to the previous 0.15 reading.
- The US Treasury will auction a 3-month, 6-month Bills, and a 2-year Note auction this Monday.
- US President Donald Trump is set to hold a press conference with President of France Macron near 19:00 GMT.
- Equities are having a sigh of relief after the German election outcome, though the German Dax is fading its intraday gains at the start of the US trading session. The broader pan-European Stoxx 50 index is even turning negative after the US opening bell.
- The CME FedWatch tool shows a 41.2% chance that interest rates will remain unchanged at current levels in June against a bigger 46.2% for a 25 basis points (bps) rate cut.
- The US 10-year yield trades around 4.43%, down over 3% from last week’s high at 4.574%.
US Dollar Index Technical Analysis: Too much to handle
The US Dollar Index (DXY) portrays a textbook element here, with the German election outcome as a catalyst. During the Asian session, a sigh of relief and support for the Euro was outpacing the Greenback in the idea that a crisis was averted with the Far-Right not having enough seats to secure the lead in Germany. However, now that the dust settles, markets start to realise that the current coalition probability is dull and the same politics markets saw in the past few decades is due, which is seen as not enough to trigger substantial additional upside in Euro.
On the upside, the 100-day Simple Moving Average (SMA) could limit bulls buying the Greenback near 106.61. From there, the next leg could go up to 107.35, a pivotal support from December 2024 and January 2025. In case US President Trump has some surprise comments on Monday, even 107.96 (55-day SMA) could be tested.
On the downside, the 106.52 (April 16, 2024, high) level has seen a false break for now. However, that does mean quite a few stops might have been triggered in the markets, with a few bulls having been washed out of their long US Dollar positions. Another leg lower might be needed to entice those Dollar bulls to reenter at lower levels, near 105.89 or even 105.33.
US Dollar Index: Daily Chart
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).
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