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.
What is your sentiment on EUR/USD?
1.07473.
Bullish.
Bearish.
Vote to see Traders sentiment!
Market sentiment:
47% 53%
You voted bullish.
You voted bearish.
Give EUR/USD a try.
Start trading.
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.
EUR/USD.
1.07 Price.
+0.150% 1D Chg, %
Swap short:
Long position overnight fee -0.0082% Short position overnight fee 0.0025% Overnight fee time 22:00 (UTC) Spread 0.00006.
AUD/USD.
0.69 Price.
-0.110% 1D Chg, %
Swap short:
Long position overnight fee -0.0057% Short position overnight fee 0.0011% Overnight fee time 22:00 (UTC) Spread 0.00006.
GBP/USD.
1.22 Price.
-0.010% 1D Chg, %
Swap short:
Long position overnight fee -0.0040% Short position overnight fee 0.0005% Overnight fee time 22:00 (UTC) Spread 0.00014.
USD/JPY.
131.83 Price.
-0.100% 1D Chg, %
Swap short:
Long position overnight fee 0.0055% Short position overnight fee -0.0145% Overnight fee time 22:00 (UTC) Spread 0.008.
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?
Rate this article.
Rate this article:
Share this article.
Rate this article.
Rate this article:
Share this article.
Comments.
Please note before commenting.
comments should be only on the topic of this article (please contact Support center for individual queries relating to your trading account); comments shouldn’t contain inappropriate content (personal attack, violence, scam, etc.); comments shouldn’t contain links to external websites; comments should match the language of the article; your comment will be moderated.
There are currently no responses for this story. Be the first to respond.
Your comment has been submitted for moderation. We confirm that your comment will be reviewed and if it complies with the comment guidelines, it will be published.
More comments.
EUR/USD 1.07383.
USD/JPY 131.847.
GBP/USD 1.21682.
AUD/USD 0.69056.
USD/CAD 1.33933.
The difference between trading assets and CFDs The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD. You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again. CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example. CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.