- EUR/USD eases throughout Tuesday after it briefly peaked above 1.10 on Monday.
- Markets see safe havens easing while US Dollar gains traction.
- Monthly Germany’s Factory Orders unexpectedly surged 3.9% in June.
EUR/USD retreats back to 1.09, shedding 100 pips since its peak performance on Monday at 1.1008, when it added another tranche of gains at the beginning of the week to its stellar move following the poor US Nonfarm Payrolls (NFP) report on Friday. Markets were spooked by recession fears, sparking an equity crisis in Asia where the two major Japanese indices, the Nikkei and the Topix, lost over 10% of value in just one trading day. Markets are recovering on Tuesday, with the US Dollar (USD) gaining against its peers and recovering most of the incurred losses from Monday.
The EUR/USD correction on Tuesday does not look to be very big or quick. Germany’s June Factory Orders data underpins the Euro (EUR) after a stellar performance. Expectations were for a very mild 0.8% month-over-month increase in June after a decline of 1.6% in May. The data exceeded expectations by coming in at a positive 3.9%.
Just ahead of the US opening bell, US Goods and Services Trade balance numbers for June came out. The May deficit got revised to 75 billion USD, in stead of 75.1 billion. The June number fell below the expected deficit fo 72.4 billion USD and came in at 73.1 billion USD.
Overnight, President of the Federal Reserve Bank of Chicago Austan Goolsbee and San Francisco Federal Reserve President Mary Daly calm traders’ nerves in the market. Both US Federal Reserve (Fed) officials said that a few softer numbers are no reason for concern and that the job market is still holding strong, with no substantial and widespread permanent layoffs taking place. Recession fears may have eased for now, though markets are starting to get afraid that the Fed has overpromised on rate cuts and might underdeliver when the moment is there to act.
Daily digest market movers: Bouncing nervous
- On Tuesday, the Asian session started off quite quickly, with Japan’s Nikkei and Topix equity indices hitting their circuit breakers. This time, this was due to substantial moves to the upside, in contrast to their sharp declines earlier this week.
- The US Dollar sees some strength across the board, with the USD/JPY pair being the biggest outlier. The US Dollar (USD) outperforms the Japanese Yen (JPY) by over 1% on Tuesday.
- On the US political front, current Vice President Kamala Harris was officially nominated as the Democratic candidate for the upcoming Us presidential elections in November.
- June US Goods and Trade deficit comes in at $73.1 billion, wider than then $72.5 billion expectation.
- On the old continent, German Factory Orders data for June were an upbeat surprise, increasing by 3.9% month-over-month after the -1.6% registered in May. Additionally, there were some lighter but still positive numbers for the German Construction Purchase Managers Index (PMI) for July, which ticked up from 39.7 to 40.0. Despite the uptick, the PMI number remains stuck in contraction.
- France’s private sector payrolls were unchanged in the second quarter. The preliminary number came in at 0.0% against 0.3% for the final reading of the first quarter.
- European Retail Sales for June declined from 0.1% in May to -0.3% in June. The yearly number went from a revised 0.5% last year to -0.3%.
Economic Indicator
Factory Orders s.a. (MoM)
The Factory orders released by the Deutsche Bundesbank is an indicator that includes shipments, inventories, and new and unfilled orders. An increase in the factory order total may indicate an expansion in the German economy and could be an inflationary factor. It is worth noting that the German Factory barely influences, either positively or negatively, the total Eurozone GDP. A high reading is positive (or bullish) for the EUR, while a low reading is negative.
Technical Analysis: EUR/USD bounces off 1.09 ahead of US session
EUR/USD is retreating after sellers came in hard on Monday once the pair briefly popped above 1.10. With that firm rejection at the psychological level and with the price action now falling back below that red descending trend line, it looks like EUR/USD will need to find support in order to regain strength for the next leg higher. As the Relative Strength Index (RSI) indicator is nearly overbought, it makes sense to let it ease back first before a possible next rally can spark.
On the upside, three stages can be recognised. First up is the 1.1017 area, where sellers came in hard on Monday. Should EUR/USD be able to rally above there, another leg higher to December’s peak at 1.1139 comes into focus. A surprise move towards 1.1275 could unfold if the Fed is forced to make a surprise emergency rate cut in case markets get out of control again for several days in a row.
Looking for support, the round level of 1.09 is an ideal candidate. In case the US Dollar gains momentum, the belt of moving averages in the 1.08 region is the next area to watch. Certainly, the 200-day Simple Moving Average (SMA) at 1.0830 looks very appealing, givenits importance in previous periods.
EUR/USD: Daily Chart
Banking crisis FAQs
The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.
In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.
The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.
The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.
