Euro: Price action appears subdued near multi-week lows
- Euro exchanges gains with losses around 1.0870 vs. the US Dollar.
- Stocks in Europe accelerate the weekly decline on Friday.
- EUR/USD met some support near 1.0850 earlier in the week.
- The USD Index (DXY) looks flattish near 103.50.
- No surprises from EMU final inflation figures in July.
- The US calendar appears empty at the end of the week.
The Euro (EUR) is currently trading within a narrow range against the US Dollar (USD), resulting in EUR/USD hovering around the 1.0870 level. This is happening amidst uncertain market trends on Friday, which are affecting risk-related assets as well as the Greenback.
Meanwhile, the Greenback is maintaining a stable position, although its recent rally seems to have encountered resistance near 103.60 (August 16) as indicated by the USD Index (DXY). The Dollar’s loss of momentum can also be attributed to a corrective decline in US yields across various maturity periods, while German 10-year bund yields have also reached multi-day lows.
In terms of monetary policy, there is renewed discussion about the Federal Reserve’s commitment to maintaining a tighter policy stance for an extended period. This is driven by the resilience of the US economy, despite some easing in the labor market and lower inflation readings in recent months.
Within the European Central Bank (ECB), there are disagreements among its Council members regarding the continuation of tightening measures after the summer. These disagreements have led to renewed weakness in the Euro.
In terms of economic data, the only notable release was the final Inflation Rate in the broader euro area, which rose by 5.3% in the year to July, and 5.5% YoY for the Core reading.
Daily digest market movers: Euro remains side-lined in the sub-1.0900 area
- The EUR trades without a clear direction vs. the USD at the end of the week
- Investors remain worried about China’s sluggish recovery.
- Inflation in Japan came in above estimates for the month of July.
- Retail Sales in the UK missed expectations during last month.
- The persistent Fed’s tighter-for-longer narrative keeps markets cautious.
- Inflation in the euro area remains sticky and well above the ECB’s target.
Technical Analysis: Euro’s near-term outlook appears negative
In case of further losses, EUR/USD could retest the July low of 1.0833 (July 6) ahead of the significant 200-day SMA at 1.0790, and eventually the May low of 1.0635 (May 31). Deeper down, there are additional support levels at the March low of 1.0516 (March 15) and the 2023 low at 1.0481 (January 6).
Occasional bullish attempts, in the meantime, are expected to meet initial hurdles at the August high at 1.1064 (August 10) prior to the weekly top at 1.1149 (July 27). If the pair clears the latter, it could alleviate some of the downward pressure and potentially visit the 2023 peak of 1.1275 (July 18). Once this region is surpassed, significant resistance levels become less prominent until the 2022 high at 1.1495 (February 10), which is closely followed by the round level of 1.1500.
Furthermore, the positive outlook for EUR/USD remains valid as long as it remains above the important 200-day SMA.
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).