Euro trespasses 1.0900 amidst an improved mood
- Euro gathers fresh traction and surpasses 1.0900 vs. the US Dollar.
- Stocks in Europe now manage to trim earlier gains.
- EUR/USD now reverses the recent 2-day leg lower.
- Germany’s Business Climate misses estimates in June.
- Markets’ attention now shifts to the ECB Forum in Portugal.
After two consecutive daily retracements, the Euro (EUR) has regained some stability and rebounded from last week’s lows near 1.0840 against the US Dollar, with its initial target being the key 1.0900 level. This so far inconclusive start to the week for EUR/USD is in line with the equally range bound theme surrounding the Greenback, which has caused the USD Index (DXY) to retreat from its multi-day highs above 103.00 seen towards the end of last week.
Market participants are expected to closely monitor the annual ECB Forum on Central Banking in Sintra, Portugal, as well as a series of speeches by ECB officials, including President Christine Lagarde.
Regarding the ECB, investors are still anticipating another 25 bps rate hike in July, while the Federal Reserve is widely expected to follow suit, according to recent comments and testimony by Chair Jerome Powell.
On the broader macroeconomic front, the potential next steps by both the Federal Reserve and the European Central Bank in normalizing their monetary policies are the subject of ongoing debate, against the backdrop of increasing speculation of an economic slowdown on both sides of the Atlantic.
From the latest CFTC Positioning Report, speculators trimmed their net long exposure in EUR to levels last seen in early April around 144.6K contracts in the week leading to June 20, a period including the 25 rate hike by the ECB at its gathering on June 15.
In terms of data, the IFO Institute reported that the Business Climate in Germany fell to 88.4 in June from 91.7. In the wake of the release, a German IFO official argued that the sector has been experiencing sluggish demand, and the order backlog has been shrinking. The analyst also stated that industry export expectations have declined dramatically, and worldwide rate rises have depressed demand.
Across the Atlantic, the only scheduled release will be the Dallas Fed Manufacturing Index for June.
Daily digest market movers: Cautious trade prevails ahead of Lagarde
- The EUR and the rest of the risk complex appears sidelined.
- Germany’s Business Climate came in short of expectations in June.
- ECB Lagarde and other policymakers speak in Sintra this week.
- Investors will closely follow any hints regarding the ECB next steps.
- US, German yields extend the decline at the beginning of the week.
Technical Analysis: Euro faces immediate target at 1.1012
EUR/USD remains under pressure, and the breakdown of the June low at 1.0844 (June 23) could open the door to a probable test of the interim 100-day SMA at 1.0809. The loss of the latter exposes a deeper pullback to the May low of 1.0635 (May 31) ahead of the March low of 1.0516 (March 15) and the 2023 low of 1.0481 (January 6).
If bulls regains the upper hand, the next hurdle is then expected at the June peak of 1.1012 (June 22) prior to the 2023 high of 1.1095 (April 26), which is closely followed by the round level of 1.1100. North from here emerges the weekly top of 1.1184 (March 31, 2022), which is supported by the 200-week SMA at 1.1181, just before another round level at 1.1200.
The constructive view of EUR/USD appears unchanged as long as the pair trades above the crucial 200-day SMA, today at 1.0567.
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).