- The Euro accelerates its losses vs. the US Dollar.
- European stocks trade mostly on the defensive.
- Final Inflation Rate in Germany matched the flash readings.
The Euro (EUR) continues its decline against the US Dollar (USD), forcing EUR/USD to retreat further and print new weekly lows in the 1.0660 zone on Wednesday.
On the other hand, the Greenback gains further strength, encouraging the USD Index (DXY) to trade at shouting distance from the 106.00 barrier on the back of persistent weakness in the overall risk environment and mixed performance in US yields across the curve.
In terms of monetary policy, there is a growing consensus among market participants that the Federal Reserve (Fed) is likely to keep its current monetary stance unchanged for the time being. The possibility of an interest rate adjustment in December has lost some momentum, especially after the recent FOMC meeting and the release of weaker-than-expected Nonfarm Payrolls data for October (+150K jobs).
A similar sentiment can be observed regarding the European Central Bank (ECB), as investors currently lean towards an extended impasse in its tightening measures, most likely until the latter part of next year.
On the Euro’s calendar, the final inflation rate in Germany showed CPI rising 3.8% YoY in October and coming in flat on a monthly basis. Later in the session, Retail Sales in the broader euro area are also due.
Across the pond, usual Mortgage Applications measured by MBA are due seconded by Wholesale Inventories. In addition, investors are expected to closely follow the speech by Chair Jerome Powell, especially amidst growing chatter about potential rate cuts by the Fed as soon as in the summer of 2024 vs. the persevering tighter-for-longer narrative seen in some Fed speakers.
Later in the session, NY Fed John Williams (permanent voter, centrist), FOMC Governor Michael Barr (permanent voter, centrist) and FOMC Governor Philip Jefferson (permanent voter, centrist) area all expected to speak as well.
Daily digest market movers: Euro weakens further ahead of Powell
- The EUR comes under extra pressure vs. the USD.
- US and German yields trade in a mixed fashion so far.
- Markets see the Fed maintaining its monetary policy intact in December.
- An extended pause appears likely by the ECB until H2 2024.
- ECB’s Martins Kazaks did not rule out further tightening.
- ECB’s Gabriel Makhlouf deemed as premature talks about rate cuts.
- ECB’s Pierre Wunsch suggested the economy maybe entering a stagflation phase.
- Geopolitical worries in the Middle East remain well in place.
- Focus is expected to be on Chair Powell’s speech.
Technical Analysis: Euro’s recovery needs to surpass 1.0750
EUR/USD corrects lower and revisits the sub-1.0700 zone on Tuesday.
The continuation of the selling pressure could force EUR/USD to initially revisit the weekly low of 1.0495 (October 13), ahead of the 2023 bottom at 1.0448 (October 15) and the round number of 1.0400.
On the upside, the immediate resistance emerges at the November high of 1.0754 (November 6) prior to the key 200-day SMA at 1.0802 and another weekly top of 1.0945 (August 30). North from here aligns the psychological threshold of 1.1000 before the August peak of 1.1064 (August 10) and the weekly high of 1.1149 (July 27), all preceding the 2023 top of 1.1275 (July 18).
So far, the pair’s outlook is expected to remain bearish as long as it trades below the 200-day SMA.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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