Euro Weakens on German Industrial Decline, USD Rate Hike Uncertainty

The euro slipped after reports revealed a larger-than-expected decline in German industrial production for September. While it initially started strong, the pair weakened as the USD gained strength, supported by a 1.5% rise in the 10-year US Treasury bond yield after a significant drop.

The decline in German industrial production for September was more significant than anticipated, posing a potential threat to the German economy, a powerhouse in Europe, and raising concerns about a technical recession, particularly in the automotive sector.

This information was disclosed by Destatis, Germany's Federal Statistical Office. In September, industrial production dropped by 1.4%, exceeding the projected 0.4% decline. The third quarter witnessed a 2.1% decrease in total production, with the automotive industry reporting a 5% drop in vehicle production compared to the previous month. Other essential sectors like electrical equipment and pharmaceuticals also experienced declines.

The Eurozone is expected to see either a slight economic contraction or stagnation in the fourth quarter, with weaker-than-anticipated economic growth in the third quarter. Early indicators, such as the Composite Purchasing Managers' Index (PMI) for October, signal economic challenges as business activity continues to decline. Services, manufacturing, and demand in several Eurozone countries, including Germany and France, are on the decline, heightening concerns about a potential recession.

While investor sentiment in the Eurozone exceeded expectations in early November, the real estate sector in Germany faced disruptions with a wave of project cancellations due to rising interest rates and building costs, causing insolvencies among developers and falling property prices.

The European Central Bank (ECB), despite previously implementing ten consecutive rate hikes, has emphasized the need to remain vigilant on inflation and the possibility of raising interest rates in the future. Financial markets are anticipating rate cuts from the ECB to support the Eurozone economy, which is at risk of recession, in contrast to the robust economic conditions in the United States.

European Union finance ministers are moving closer to a deal on new fiscal rules for the 27-nation bloc, but significant differences regarding the pace of debt reduction remain a major obstacle. These discussions are part of the revision of the EU's fiscal rules, which had been suspended since 2020 but are set to be reinstated from 2024.

The rules impose limits on budget deficits and public debt. Many European governments currently exceed these limits while also needing to invest in combating climate change. The primary sticking point remains the pace of debt reduction, with Germany advocating for a mandatory annual debt reduction of at least 1% of GDP for all EU countries, while the European Commission and France believe that any debt reductions over four years would be acceptable.

Eurozone producer prices in September met expectations by increasing 0.5% from the previous month but dropping 12.4% year-on-year, primarily due to a sharp decline in energy prices. Energy prices rose 2.2% month-on-month, while prices for intermediate and non-durable consumer goods fell by 0.2%. These producer price trends are an early indicator of consumer inflation, which the European Central Bank aims to reduce to its 2.0% target from the 4.2% rate observed in October, marking its lowest level in over two years.

ECB President Christine Lagarde reaffirmed the institution's commitment to achieving a 2% inflation rate by 2025. She also highlighted the potential future increase in food prices due to climate change-related environmental uncertainty, which could exacerbate economic instability.

The US dollar rebounded, strengthened, and held its ground after a series of Federal Reserve speakers hinted at the possibility of further rate hikes. Additionally, traders viewed the sharp selloff from the previous week as overdone in the short term. Markets are uncertain about whether the peak in US interest rates has been reached and when the Fed might begin easing monetary conditions.

Futures markets indicate a roughly 15% chance of another rate hike by January but also suggest a 22% probability of rate cuts as early as March, as indicated by the CME FedWatch tool.

Any deviation from the expected unchanged policy rate in December could further bolster the USD and negatively affect the EUR/USD pair. Consequently, the euro is likely to remain somewhat pressured in its downward trend, while the US dollar is expected to remain volatile, with the potential for upward or downward adjustments in its upward trajectory during this time.

Data for Technical Analysis (5H) CFD EUR/USD

Resistance : 1.0704, 1.0711, 1.0722

Support : 1.0682, 1.0675, 1.0664

5H Outlook

Source: Investing.com

Buy/Long 1 If the support at the price range 1.0672 - 1.0682 is touched, but the support at 1.0682 cannot be broken, the TP may be set around 1.0710 and the SL around 1.0667, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0704 - 1.0714, TP may be set around 1.0728 and SL around 1.0677, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0704 - 1.0714 is touched, but the resistance at 1.0704 cannot be broken, the TP may be set around 1.0681 and the SL around 1.0719, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0672 - 1.0682, TP may be set around 1.0660 and SL around 1.0709, or up to the risk appetite.       

Pivot Points Nov 08, 2023 02:58AM GMT

Sources: Investing 1, Investing 2