- The Euro extends losses against the US Dollar.
- A broad-based bearish sentiment hurt European stocks on Tuesday.
- Germany Industrial Production surprised to the downside.
The Euro (EUR) adds to Monday’s decline against the US Dollar (USD), motivating EUR/USD to retreat to two-day lows near 1.0680 on Tuesday.
The Greenback manages to regain further balance and lifts the USD Index (DXY) to the mid-105.00s against the backdrop of renewed weakness in risk appetite, particularly in response to weaker trade results in China. The move lower in the pair is also accompanied by a knee-jerk in both US and German yields.
Regarding monetary policy, markets expect the Federal Reserve (Fed) to keep policy unchanged. The potential for an interest-rate hike in December appears to have lost momentum, particularly after the latest FOMC gathering and Friday’s publication of weaker-than-anticipated Nonfarm Payrolls data for October.
As for the European Central Bank (ECB), investors also favour an extended pause of its rate-hiking cycle, most probably until the second half of next year.
On the economic calendar, German Industrial Production contracted more than estimated at a monthly 1.4% in September and 3.7% vs. the same month of 2022. In addition, German Construction PMI receded to 38.3 in October. Looking at the broader eurozone, the Construction PMI ticked lower to 42.7 during last month and Producer Prices rose at a monthly 0.5% in September and dropped 12.4% over the last twelve months.
Across the Atlantic, Balance of Trade results for September are due at 13:30 GMT, prior to the IBD/TIPP Economic Optimism index and Consumer Credit Change.
Additionally, market participants are expected to closely follow speeches by FOMC Governor Michael Barr (permanent voter, centrist), FOMC Governor Christopher Waller (permanent voter, hawk), NY Fed President John Williams (permanent voter, centrist), Dallas Fed President Lorie Logan (voter, hawk), Minneapolis Fed President Neel Kashkari (voter, centrist) and Chicago Fed President Austan Goolsbee (voter, centrist).
Daily digest market movers: Euro gives away part of the recent move above 1.0700
- The EUR slips back below the 1.0700 hurdle against the USD.
- US and German yields trade on the defensive so far on Tuesday.
- The Fed is seen keeping its monetary policy unchanged in December.
- The ECB is likely to keep its rates unchanged until H2 2024.
- The Middle East conflict looks everything but abated.
- The RBA raised its OCR by 25 bps, as widely expected.
- Chinese trade balance figures disappoint in October.
Technical Analysis: Euro’s outlook remain negative below the 200-day SMA
EUR/USD corrects lower and slips back to the area below the 1.0700 yardstick on Tuesday.
The November peak of 1.0754 (November 6) follows next on the upswing for EUR/USD, seconded by the crucial 200-day Simple Moving Average (SMA) at 1.0805 and another weekly top of 1.0945 (August 30) before the psychological barrier of 1.1000. Beyond this zone, the pair may encounter resistance at the August high of 1.1064 (August 10), ahead of the weekly peak of 1.1149 (July 27) and the 2023 high of 1.1275 (July 18).
Sellers, on the other hand, are anticipated to face support at the weekly low of 1.0495 (October 13), before approaching the 2023 bottom at 1.0448 (October 15) and the round number of 1.0400.
The pair’s outlook is predicted to remain bearish as long as it remains below the 200-day SMA.
(This story was corrected on November 7 at 09:14 GMT to say, in the fourth graph, that investors favour the ECB to keep interest rates unchanged until the second half of next year.)
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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