Euro retreats below 1.1200 as French yields rally, Oil flirts with five-month highs
- EUR/USD hits session lows below 1.1200 after failing to extend its recovery beyond the 1.1250 area.
- Oil price rally and ongoing French debt woes pose a heavy weight for any significant Euro recovery.
- The US Dollar remains depressed, which is keeping the Euro from depreciating further.
The Euro (EUR) pares recent gains against the US Dollar (USD) on Thursday, as the escalation in France's bond yields and the higher Oil prices amid growing uncertainty in the Middle East prove a heavy weight for any significant recovery. The EUR/USD pair has returned below the 1.1200 level at the US session opening, after being rejected just above 1.1250 earlier in the day.
France’s debt yields have rushed to fresh highs amid investors’ concerns about the government’s inability to stem the fragile fiscal stability, while the country braces for further protests next Saturday, with the images of last week’s riots still in everyone’s mind. In this context, the yield of the benchmark 10-year OAT note has jumped to 5.10%, its highest level since 2002.
Moody’s rating agency is expected to review France's credit status on Friday, and markets are anticipating a downgrade, which would add strain on the country’s troubled credit status. Moody’s ranked France’s sovereign debt with an Aa3 rating in April, but the Outlook is negative, and the latest developments have not helped to improve it.
Brent Oil prices add pressure on the Euro
Beyond that, Brent Oil prices have rallied above $108.00, nearing the highest levels in the last five months, clouding the economic outlook of Eurozone economies and boosting inflationary pressures higher, ultimately threatening to tip the region into a stagflationary cycle.
The US Dollar, on the other hand, is not faring much better this week, which keeps the Euro from falling further. US Treasury yields are retreating from recent highs, as investors assunme that the Federal Reserve will hit the pause button next week, and ponder the overall scope of the monetary tightening cycle.
Looking ahead, Analysts at ING argue that “until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board.” In this context, the bank “favour[s] consolidation over correction for the DXY Dollar index, but do[es] not rule out some further softening to the 101.25/30 area,” suggesting any Dollar weakness is likely to be contained rather than the start of a broader downtrend.
Euro FAQs
The Euro is the currency for the 20 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.
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