- The Euro gains strength against the Dollar.
- Stock markets in Europe are trading negative so far on Wednesday.
- EUR/USD seems to have found some support near 1.0700 for now.
- The US Dollar DXY Index is giving up some ground after the recent highs reached.
- The US ISM Services PMI will be in the spotlight on Wednesday.
- German factory orders fell 11.7% mom in July.
- Eurozone retail sales contracted 0.2% mom in July.
The Euro (EUR) accelerates its recovery against the US Dollar (USD) during the European session on Wednesday, lifting EUR/USD to daily highs near the 1.0750 zone.
After hitting fresh 6-month highs just below 105.00 the day before, the dollar is facing some selling pressure and pulls back to the 104.80-104.70 region according to the DXY Dollar Index. The daily decline in the DXY index was accompanied by further weakness in US yields across maturities.
Meanwhile, the market continues to trust the decision of the Federal Reserve (Fed) to end its campaign of interest rate hikes for the remainder of the year. At the same time, investors seem to assume that any interest rate cuts might not come until March 2024.
On the contrary, the European Central Bank (ECB) finds itself facing a panorama plagued with great uncertainty regarding the future course of interest rates beyond the summer season. Market deliberations revolve around the notion of stagflation, which amplifies the prevailing air of ambiguity.
On the eurozone economic calendar, the construction PMI in Germany improved slightly to 41.5 in August, and factory orders contracted notably by 11.7% in July from the previous month. In the euro bloc, retail sales contracted 0.2% m/m in July and 1.0% from a year earlier, and the construction PMI dipped to 43.4 over the past month.
In the United States, mortgage applications, according to the MBA, contracted 2.9% in the week to September 1. Later in the American session, the IBD/TIPP Economic Optimism Index, Trade Balance, S&P Global Services PMI and ISM Services PMI for August will be released ahead of speeches by Susan Collins of the US Fed. Boston, and Lorie Logan of the Dallas Fed.
Market drivers: The Euro extends the rebound due to the weakness of the Dollar
- The rebound of the Euro against the Dollar picks up strength again in the middle of the week.
- US yields leave previous gains behind and return to negative territory.
- Klaas Knot, from the ECB, does not rule out a further rise in interest rates.
- ECB’s Peter Kazimir calls for a rate hike next week and a pause thereafter.
- Disinflation and cracks in the US labor market support the Fed’s pause.
- Markets continue to price in a Fed rate cut in the second quarter of 2024.
Technical Analysis: Euro risks continue to tilt to the downside
EUR/USD has found some initial respite from the ongoing sharp pullback around the 1.0700 area. However, the recent breakout of the 200-day SMA at 1.0820 continues to favor further short-term losses.
If EUR/USD accelerates its losses, it could revisit the May 31 low at 1.0635 before the March 15 low at 1.0516. The loss of the latter could trigger a possible test of the 2023 low at 1.0481 marked on January 6th.
To the upside, EUR/USD is expected to head to the 200-day SMA at 1.0820. Higher up, bulls should aim for the 1.0945 weekly high on Aug 30 ahead of the 55-day SMA at 1.0953 and ahead of the 1.1000 psychological barrier and Aug 10 high at 1.1064. Once the latter is broken, the pair could challenge the July 27 high at 1.1149. If the pair breaks above this zone, it could relieve some of the bearish pressure and potentially visit the 2023 high of 1.1275 on July 18.
A sustained decline in EUR/USD is likely as long as it remains below the 200-day SMA.
Frequently asked questions about the German economy
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 in the Eurozone. The economic results of Germany, its GDP, employment and inflation can greatly influence the general stability and confidence in the Euro. If the German economy strengthens, it can reinforce the value of the Euro, while if it weakens, the opposite is true. In general, the German economy plays a crucial role in the strength of the Euro and its perception in world markets.
What is Germany’s political role in the eurozone?
Germany is the largest economy in the eurozone and therefore an influential player in the region. During the eurozone sovereign debt crisis of 2009-12, Germany was instrumental in creating various stability funds to bail out debtor countries. After the crisis, he took a leading role in the implementation of the “Fiscal Compact”, a set of stricter rules to manage the finances of member states and punish “debt sinners”. Germany spearheaded a culture of “financial stability” and its economic model has been widely used as a model for economic growth by other eurozone members.
What are the German Bunds?
Bunds are bonds issued by the German government. Like all bonds, they pay their holders a periodic payment of interest, or coupon, followed by the full value of the loan, or principal, at maturity. Since Germany has the largest economy in the Eurozone, Bunds are used as a benchmark for other European government bonds. Long-term Bunds are considered a sound and risk-free investment as they are backed by the full faith and credit of the German nation. For this reason, investors consider them a refuge value, which appreciate in times of crisis and fall in periods of prosperity.
What are German Bond Yields?
German Bond Yields measure the annual return an investor can expect from holding German government bonds, or Bunds. Like other bonds, Bunds pay their holders interest at regular intervals, called a “coupon,” followed by the full value of the bond at maturity. While the coupon is fixed, the yield varies as it takes into account changes in the price of the bond and is therefore considered a more accurate reflection of profitability. A decrease in the Bund price increases the coupon as a percentage of the loan, which translates to a higher yield and vice versa for an increase. This explains why the Bund’s yield moves inversely with prices.
What is the Bundesbank?
The Bundesbank is the central bank of Germany. It plays a key role in the implementation of monetary policy in Germany and, in general, in the central banks of the region. Its objective is price stability, that is, keeping inflation low and predictable. It is responsible for ensuring the proper functioning of payment systems in Germany and is involved in the supervision of financial institutions. The Bundesbank has a reputation for being conservative and prioritizes fighting inflation over economic growth. It has influenced the creation and policy of the European Central Bank (ECB).
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
