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Euro under pressure again as worse-than-expected data from Germany continues

January 8, 2025 (Investorideas.com Newswire) Investorideas.com, a go-to platform for big investing ideas releases market commentary from Samer Hasn, Senior Market Analyst at XS.com

The euro is under pressure against the US dollar to give up early morning gains following yesterday's losses.

The euro's consecutive losses are driven by contrasting economic signals from the eurozone and the United States. While the U.S. economy and labor market demonstrate consistent resilience, the eurozone - particularly Germany - remains on a precarious downward trajectory, with no immediate hope for a swift return to growth.

This disparity in economic performance is likely to keep the interest rate trends between the two economies diverging, keeping the bond yield gap in favour of US Treasuries, putting further pressure on the euro.

The gap is near its highest level since 2019 in favour of the 10-year Treasury bond versus its German counterpart for the same term. The 10-year Treasury yield also hit its highest level since April of last year today and is closer to its 2023 peaks. This gap is likely to widen further in the coming days if US labor market and inflation data also come in better than expected, which in turn could further cement the euro on its path to parity with the US dollar.

In today's data, German retail sales unexpectedly contracted by 0.6% on a monthly basis in November but grew faster than expected on a yearly basis by 2.5%. In addition, factory orders contracted much faster than expected by 5.4% on a yearly basis. Earlier this week, we saw Sentix's January economic indicator report, which sent many negative signals about the Eurozone economy and warned again of the possibility of sliding into recession in light of the political and economic turmoil and the expected trade war with the US.

In contrast to the weak data from Germany, we saw better than expected data from the US economy yesterday, where service sector growth accelerated more than expected, as did job growth. While yesterday's data deepened the prevailing pessimism about the slow pace of rate cuts during this year.

According to the CME FedWatch Tool, the probability of a rate cut at this month's meeting is now only 5%, with around 35% and 40% for cuts in March and May, respectively. In contrast, the European Central Bank is expected to continue to cut borrowing cost this year and does not have the flexibility to do otherwise due to the continued deterioration in economic performance.

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