- The Euro makes a U-turn against the US Dollar.
- European stocks trade with decent gains so far on Monday.
- Germany’s flash Q3 GDP Growth Rate surprises to the upside.
The Euro (EUR) leaves behind the initial pessimism against the US Dollar (USD), encouraging EUR/USD to climb to daily highs and revisit the proximity of the key barrier at 1.0600 the figure in the wake of the opening bell in Europe on Monday. The sudden bounce in the single currency comes in response to unexpected auspicious results from advanced GDP figures in Germany for the July-September period.
In the interim, the Greenback comes under some downside pressure and relaxes to the 106.40 zone, when gauged by the USD Index (DXY). The modest loss of momentum of the index comes in contrast to a languid climb in US yields across diverse timeframes.
Within the realm of monetary policy, a growing consensus has materialized amongst market participants that the Federal Reserve (Fed) will preserve its present stance of retaining interest rates unchanged at the upcoming meeting on November 1. The potential remains, however, for a potential shift in rates in December, a view that seems well reinforced by the resilience of the US economy and still elevated inflation levels.
Regarding the European Central Bank (ECB), no surprises arose at its event on October 26 following a unanimous decision to keep its interest rates unchanged. President Christine Lagarde reiterated once more that work remains to be done to bring inflation back to target, while it is anticipated that inflation will remain too elevated for too long. Adding a bearish undertone to the meeting, Lagarde acknowledged that risks to the economic outlook appear skewed to the downside.
From the speculative community’s viewpoint, net longs in the single currency increased to four-week highs in the week ended on October 24, according to the CFTC report. The period coincides with some consolidation in the pair against the backdrop of persistent resilience of the US economy and rising cautiousness prior to the ECB event.
Busy day in the euro calendar, as Germany’s advanced figures for the Q3 GDP Growth Rate showed the economy is expected to contract 0.1% QoQ and 0.3% YoY, while preliminary Inflation Rate for the month of October is due later. In the broader Eurozone, final Consumer Confidence came in at -17.9, Economic Sentiment receded to 93.3 and Industrial Sentiment worsened to -9.3, all prints for the month of October.
Daily digest market movers: Euro’s advance remains capped around 1.0600
- The EUR attempts a moderated recovery against the USD.
- US and German yields appear mixed at the beginning of the week.
- There is still scope for the Fed to raise rates in December.
- The ECB is seen extending its pause until H2 2024.
- ECB’s Simkus sees a soft landing of the region’s economy.
- ECB’s Kazimir suggests the ECB must keep its current restrictive stance for many quarters.
- The Middle East conflict threatens to extend to other regions.
- Investors continue to factor in further FX intervention around USD/JPY.
- Retail Sales in Australia expanded more than expected in September.
- Preliminary Inflation Rate in Spain came in at 3.5% YoY in October.
Technical Analysis: Euro could see its downside pressure mitigated above 1.0700
EUR/USD picks up some upside traction and shifts its focus to the 1.0600 hurdle on Monday.
In case sellers push harder, EUR/USD could revisit the weekly low of 1.0495 (October 13), ahead of the lowest level in 2023 at 1.0448 (October 15), and the round number of 1.0400.
On the upside, the immediate short-term target for the pair emerges at the October high of 1.0694 (October 24), a level that appears reinforced by the proximity of the temporary 55-day Simple Moving Average (SMA) at 1.0673. Further up comes the weekly top of 1.0767 (September 12) before the key 200-day SMA at 1.0810, and another weekly high of 1.0945 (August 30), all ahead of the psychological level of 1.1000. Beyond this zone, the pair might face resistance at the August top at 1.1064 (August 10), prior to the weekly peak of 1.1149 (July 27) and the 2023 high at 1.1275 (July 18).
The pair’s outlook is expected to remain negative while below the critical 200-day SMA.
(This story was corrected on October 30 at 11:03 GMT to say that the USD Index (DXY) lost momentum instead of strengthened)
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).
Credit: Source link