Euro drops further and approaches the March low
- The Euro maintains the bearish tone against the US Dollar.
- Stocks in Europe keep the mixed bias on Wednesday.
- EUR/USD slips back to new lows near 1.0530.
- The USD Index (DXY) extends its rally to new 2023 peaks.
- Consumer Confidence in Germany expected to worsen in October.
- US Durable Goods Orders take centre stage across the pond.
The Euro (EUR) experiences an increasing bearish sentiment against the US Dollar (USD), prompting EUR/USD to decline and reach a fresh six-month lows near 1.0530 on Wednesday.
Conversely, the Greenback continues to strengthen for the fourth consecutive session, reaching new highs for 2023 around 106.50 when gauged by the USD Index (DXY). This level was last seen in late November 2022.
The further decline in the pair is accompanied by a corrective move in US and German yields, which abandon the area of recent multi-year highs despite broadly unchanged expectations in the monetary policy scenario.
Regarding the latter, investors persist in factoring in an additional 25 basis points rate increase by the Federal Reserve (Fed) by year-end. Meanwhile, discussions in the market continue to lean towards an impasse at the European Central Bank (ECB), even in light of persistent inflation levels that significantly surpass the bank’s target.
In the European calendar, Consumer Confidence in Germany is expected to weaken slightly to -26.5 in October, according to GfK.
In the US, Mortgage Applications tracked by MBA are due in the first turn, followed by the more relevant Durable Goods Orders data for August.
Daily digest market movers: Euro succumbs to the risk-off sentiment
- The EUR keeps the offered stance unchanged against the USD.
- US and German yields correct lower across different maturities.
- Investors continue to see the Fed raising rates by 25 bps before end of 2023.
- Markets speculate on probable interest rate cuts by the Fed in Q3 2024.
- Market chatter over a pause by the ECB remains on the rise.
- ECB member of the Executive Board Frank Elderson says rates haven’t necessarily peaked.
- Intervention concerns remain well and sound around USD/JPY.
- BoJ Minutes favoured the continuation of the current monetary stance.
Technical Analysis: Euro now looks at 1.0516
The EUR/USD continues to demonstrate signs of weakness, trading in close proximity to the March low around 1.0515.
On the downside, immediate support for the EUR/USD can be found at the March 15 low of 1.0516, followed by the 2023 low of 1.0481 seen on January 6.
Regarding potential resistance levels, there is a minor obstacle at the September 12 high of 1.0767, and a more significant barrier at the 200-day Simple Moving Average (SMA) at 1.0828. If the pair manages to break above this level, it could pave the way for further recovery, targeting the temporary 55-day SMA at 1.0879, with the possibility of reaching the August 30 high of 1.0945. Surpassing this level could shift the focus towards the psychological level of 1.1000, followed by the August 10 peak of 1.1064. Beyond that, the pair may retest the July 27 top at 1.1149 and potentially reach the 2023 high at 1.1275 from July 18.
However, as long as the EUR/USD remains below the 200-day SMA, there is a possibility that downward pressure will persist.
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).