- The euro continues to fluctuate around the 1.0700 area against the US dollar.
- European stocks are on the defensive.
- The EUR/USD pair finds initial resistance around 1.0730.
- The US Dollar Index (DXY) is testing the 105.00 zone.
- The final CPI for August in Germany was in line with the preliminary values.
- Next on the United States agenda will be wholesale inventories and changes in consumer credit.
On Friday, the Euro (EUR) managed to gain some bullish momentum against the US Dollar (USD), pushing EUR/USD back above the 1.0700 level towards the end of the week.
The dollar saw a partial pullback from its six-month high above the 105.00 threshold, as indicated by the US Dollar Index (DXY), due to a slight rebound in investor risk appetite and the lack of clear direction in the US bond is market.
Regarding monetary policy, speculation about a possible rate hike by the Federal Reserve (Fed) appears to have lost some momentum in November. Meanwhile, market participants continue to calculate the likelihood of interest rate cuts sometime in the second quarter of 2024.
As for the European Central Bank (ECB), there is talk in the markets that the next meeting on September 14th could lead to a recess given the divided opinions in the Council.
On the euro agenda, final inflation figures in Germany recorded a monthly CPI rise of 0.3% in August and 6.1% in the last twelve months, unchanged from preliminary estimates, while industrial production in France fell 0.8% month-on-month % grew in July.
Daily Market Summary: The Euro remains under pressure as we await the ECB
- The euro is showing signs of life against the dollar.
- Yields in the United States and Germany appear to be trending lower early Friday.
- Investors expect the ECB to leave its deposit rate unchanged this month.
- Dallas Fed President Lorie Logan argues for a pause in September.
- New York Fed President John Williams expects the unemployment rate to rise to over 4%.
- Markets remain confident that the Fed will cut its key interest rate in the second quarter of 2024.
- Strikes at Chevron’s LNG facilities begin today.
- The final GDP growth rate in Japan was 4.8% year-on-year.
Technical analysis: The euro keeps the door open for a decline to 1.0635
EUR/USD is trading with slight gains near 1.0700 on Friday after hitting a multi-week low near 1.0680 in the previous session.
If EUR/USD manages to break Thursday’s level at 1.0685, it could retest the May 31 low at 1.0635 before potentially reaching the March 15 low at 1.0516. A break of this latest level could trigger a possible test of the 2023 low at 1.0481 on January 6th.
However, for an upside move, the current target is the critical 200-day SMA at 1.0822. Additionally, bullish momentum could see the August 30 level at 1.0945 challenged, reinforced by the interim 55-day SMA at 1.0945. This could subsequently set the stage for a move towards the psychological level of 1.1000 and the August high at 1.1064. Should the pair manage to break above this zone, it could ease some downward pressure and potentially move towards the July 27 high at 1.1149 before reaching the 2023 high at 1.1275 on July 18.
As long as EUR/USD stays below the 200-day SMA, the pair is likely to continue trending lower.
Frequently asked questions about the German economy
The German economy has a significant influence on the euro due to its status as the largest economy within the Eurozone. Germany’s economic performance, GDP, employment and inflation can have a major impact on overall stability and confidence in the euro. If the German economy gets stronger, this can strengthen the value of the euro, while if it weakens, the opposite happens. Overall, the German economy plays a crucial role in the strength of the euro and its perception on global markets.
Germany is the largest economy in the Eurozone and therefore an influential player in the region. During the Eurozone sovereign debt crisis of 2009–2012, Germany was instrumental in the creation of several stability funds to rescue debtor countries. After the crisis, it took a leading role in implementing the “fiscal compact,” a set of tougher rules to manage member states’ finances and punish “debt defaulters.” Germany pioneered a culture of “financial stability” and its economic model was widely used by the other Eurozone members as a model for economic growth.
Federal bonds are bonds issued by the German state. Like all bonds, they pay their holders a regular interest payment or coupon, followed by the total value of the loan or principal at maturity. Since Germany is the largest economy in the Eurozone, federal bonds serve as a benchmark for other European government bonds. Long-term federal bonds are considered a solid and risk-free investment because they are based on the full trust and creditworthiness of the German nation. For this reason, investors view them as a safe haven that increases in value in times of crisis and falls in times of prosperity.
The return on German bonds measures the annual return that an investor can expect from owning German government bonds or federal bonds. Like other bonds, federal bonds pay their holders interest at regular intervals, a so-called “coupon,” followed by the total value of the bond at maturity. While the coupon is fixed, the yield varies because it takes into account changes in the price of the bond, so it is considered a more accurate reflection of profitability. A decrease in the price of the federal bond increases the coupon as a percentage of the loan, resulting in a higher yield and, conversely, an increase. This explains why the Bund yield moves in the opposite direction to prices.
The Bundesbank is the central bank of Germany. It plays a key role in the implementation of monetary policy in Germany and generally in the region’s central banks. Their goal is price stability, that is, keeping inflation low and predictable. It is responsible for the proper functioning of payment systems in Germany and participates in the supervision of financial institutions. The Bundesbank has a reputation for being conservative and puts fighting inflation ahead of economic growth. It influenced the founding and policies of the European Central Bank (ECB).