EUR/USD falls back amid fears over German economic outlook
- EUR/USD surrenders most of its initial gains as the US Dollar bounces back.
- Market participants worry that potential German coalition government formation will unlikely uplift the economy.
- Weak US private business activity data weighed on the US Dollar.
EUR/USD gives up most of its intraday gains after revisiting the one-month high near 1.0530 in Monday’s European session. The major currency pair surrenders significant gains as the Euro (EUR) weakens in the aftermath of the German federal election, with the absence of a clear majority by a single party that would hinder growth in the already fractured economy.
Christian Democratic Union of Germany (CDU) leader Friedrich Merz is set to become the German Chancellor after getting majority votes but is expected to face a slew of difficulties, including complicated negotiations to form a coalition government. The most likely scenario seems to be a coalition between the CDU and the Social Democratic Party of Germany (SPD).
Analysts at ING expect the next German government is unlikely to deliver much more for the economy than a “short-lived positive impact from some tax cuts, small reforms, and a bit more investment.”
The broader outlook for the Euro remains weak as European Central Bank (ECB) officials continue to support a consistent policy easing cycle. On Saturday, ECB policymaker and Governor of the Bank of France François Villeroy de Galhau said in an interview with Alternatives Economiques that the central bank could cut its deposit rate down to 2% by this summer. His comments came a day after the release of the Eurozone flash HCOB Purchasing Managers Index (PMI) data for February on Friday.
The preliminary PMI report showed on Friday that the Eurozone Composite PMI remained unchanged at 50.2, slower than estimates of 50.5. Additionally, overall business activity in France contracted at a faster-than-expected pace.
On the economic front on Monday, German IFO data for February has majorly come in weaker than expected. The IFO Business Climate, which measures current conditions and business expectations, came in at 85.2, as in January, lower than estimates of 85.8. On the contrary, IFO Expectations - which gauges current conditions and business expectations for the next six months - improved to 85.4 from estimates of 85.2 and the former reading of 84.3.
Daily digest market movers: EUR/USD retreats as US Dollar recovers strongly
- The downside move in the EUR/USD pair is also driven by a strong US Dollar (USD) recovery, with investors looking beyond the weak United States (US) flash S&P Global PMI data for February.
- The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, rebounds to near 106.40 after posting a fresh 11-week low around 106.10 earlier in the day.
- The US S&P Global PMI report showed on Friday that overall private business activity rose at a slower pace. The Composite PMI, which gauges activities in both manufacturing and the services sector, fell to 50.4. This is the lowest reading since September 2023.
- A notable decline in the services sector activities led to a significant slowdown in the comprehensive business activity data. The Services PMI surprisingly declined to 49.7 from 52.9 in January due to political uncertainty, notably in relation to federal spending cuts and potential policy impacts on economic growth and inflation outlooks, according to the PMI report. Contrary to a decline in activities in the services sector, the Manufacturing PMI expanded at a faster-than-expected pace to 51.6.
- Weak US PMI data has led to a decent increase in Federal Reserve (Fed) dovish bets. The likelihood that the Fed will cut interest rates in the June meeting has increased to 63.5% from almost 50% recorded a week ago.
- Meanwhile, fears of global slowdown due to US President Donald Trump’s tariff agenda have supported the US Dollar. Trump has threatened to introduce reciprocal tariffs and levies on lumber and forest products, semiconductors, pharmaceuticals, and automobiles.
Technical Analysis: EUR/USD falls back from 1.0530
EUR/USD retreats from an intraday high of 1.0530 to near 1.0480 in European trading hours on Monday. The 50-day Exponential Moving Average (EMA) continues to offer support to the major currency pair at around 1.0437.
The 14-day Relative Strength Index (RSI) wobbles around 60.00. A bullish momentum would activate if the RSI (14) sustains above that level.
Looking down, the February 10 low of 1.0285 will act as the major support zone for the pair. Conversely, the December 6 high of 1.0630 will be the key barrier for the Euro bulls.
Euro FAQs
The Euro is the currency for the 19 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the 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.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.