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EUR - North vs South: Are Club-Med debt fears re-emerging as ECB rate hikes continue?

Better German labour numbers this morning couldn’t deter EUR/USD from falling almost 1% to 1.0559. A revitalised USD re-found some grip ahead of a cluster of Stateside data – Fed minutes and the nonfarm payrolls – preparing to dock.

Germany’s Federal Labour Office this morning confirmed December unemployment was cut by 13,000 to 2.52m against expectations of a 15,000 rise, better than thought.

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German inflation drops to 8.6% in December – better news for EUR/USD?

30m 1h 4h 1d 1w.

Careful with the Benzene.

However a tighter labour market is flammable material for wage growth, an inflation-fighting priority for the ECB rate-setters.

Like all developed economies the German economy is desperately attempting to slay inflation – German CPI came in at 8.6% in December a short time ago – while the Harmonised Index of Consumer Prices (HICP) fell to 9.6% from 11.3% on a yearly basis.

HCIP numbers are the ECB’s preferred inflation measuring stick.

German wages are rising – three examples.

North Sea German dockworkers are to see a 9.5% increase. Metal industry workers via the IG Metall union have agreed a 8.5% wage hike plus a one-off, tax-free €3,000 cash payment. Chemical industry workers have agreed a 6.5% wage climb.

Currently markets reckon the ECB will winch rates by 50 basis points on 2 February – on top of the 2.5 percentage points’ of total rises since last summer. More hawkish noises from ECB policymaker Joachim Nagel has also failed to impress EUR/USD sentiment. How bad a corner is the German economy in at the start of 2023?

Capital’s Daniela Hathorn says economies in southern Europe saw decent 2022 growth thanks to tourism reactivating with pent-up demand from Covid.

“There have been some warning signs about the German economy during the latter part of the year, but the latest forecasts show that the recession in the German economy may be milder than originally expected.”

A predominantly debt-ridden south is now at higher risk of deeper recession. This means 2023 “will likely see the shift back towards Germany as the economic powerhouse of Europe on the back of improving production capacity whilst tourism-led countries are likely to start to feel the pinch from reduced disposable incomes as a result of higher costs of living”.

German business model – deindustrialising option?

But Germany is battling rocketing industry costs – outsourcing much of its energy needs to Russia has proved catastrophic – even if many Germans won’t experience shock hikes personally until later this year.

Crucial German manufacturing PMIs improved to 47.1 last month, compared to 46.2 in November but that is still well below the 50.0 shadow line separating economic contraction from expansion.


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A retreating Chinese market – Covid-infected supply chain pressures plus Xi Jinping’s increasingly close relations with President Putin – has strained Germany’s ability to diversify business relationships and partnerships, even if some Chinese restrictions are easing.

Road to recovery?

Which must mean more reliance on Europe, but at the corners lie more industrial pressure, such as the EU’s industrial emissions directive, not to mention the EU’s chemicals strategy for sustainability which could see a raft of products banned.

Germany has reliably turned things around before but it does not have the reserves of cheap energy it had pre March 2022. But based on current energy prices, headline inflation in the entire eurozone could come down faster than the ECB had forecast in December says ING.

“The past experience of energy price shocks has also shown that headline inflation can come down quickly, while core inflation remains stubbornly high and can even continue to increase.

“Therefore, today’s inflation numbers are not a relief, yet, only a reminder that eurozone inflation is still mainly an energy price phenomenon.”

Credibility capital?

Italy’s position compared to Germany has a different set of problems and may be increasingly at risk from a fresh debt crisis as the ECB, with no growth mandate, continues to hike rates.

Italian debt is currently estimated at 145% of GDP and Rome’s borrowing costs are rising – more half-point rate increments from the ECB are more or less baked in for early 2023.

Could Italian debt be repaid at 5% plus? It’s not so far off currently but so far the new Meloni government has prioritised continuity over disruption.

Predictions of Italian implosion have turned up more or less every year since the Romans – maths super-nerd Fibonacci and Galileo were Italian – but Italy hasn’t defaulted yet.

Fx Strategist And Finance Consultant At Keirstone, Francis Fabrizi.

“EUR/USD failed to break above the 1.0740 resistance level and is showing strong bearish momentum this morning." “We can see price is attempting to test 1.0500. If this support level is broken, I feel 1.0320 will be the next target sellers will aim for. Looking at the weekly timeframe, price remains in a downward trend as long as it stays below 1.0800." "I anticipate a temporary pullback around 1.0500 however my overall bias for this pair remains bearish.”

Near 1.30pm DXY had sprinted 1.32% higher to 104.34 while EUR/USD was 1.18% down at 1.0553; GBP/USD slipped 0.74% down to 1.1987; USD/JPY was 0.17% up at 130.80.

Related reading.

GBP vs house prices: Pound falls as UK property market weakens in response to rising rates.

USD/RUB rally: Are markets forecasting pain in the Ukraine for Russia in 2023?

2023 unwrapped: USD, GBP, EUR, Gold, Natural Gas, S&P 500, Nasdaq 100 outlook for the year ahead.

Japanese CPI hits 40-year high – is USD/JPY heading for 120?

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EUR/USD 1.07383.

USD/JPY 131.847.

GBP/USD 1.21682.

AUD/USD 0.69056.

USD/CAD 1.33933.

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