Category: Blog

EUR Outlook: German Weakness Persists Before Potential Recovery

Key Insights:

• German Ifo index continues to decline, reinforcing dovish European Central Bank (ECB) expectations.
• Fiscal support from the upcoming German elections may provide future growth relief.
• ING maintains a cautious view on EUR/USD, favoring a bearish stance into 2024.

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Market Overview

German Growth Concerns
The latest decline in Germany’s Ifo index, a key economic sentiment indicator, adds to concerns about the eurozone’s economic outlook. This softness keeps markets aligned with expectations of a dovish ECB. However, some optimism exists that fiscal measures following Germany’s upcoming election may offer medium-term support to the economy.

EUR/USD Outlook
EUR/USD continues to hover near the 1.0500 level, a critical point of stability. ING anticipates this trend will persist through the end of the year. Looking ahead, ING retains a bearish bias on EUR/USD entering 2024, citing potential economic and policy shifts as President Donald Trump begins his second term.

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UK Data and EUR/GBP Dynamics

UK CPI Update
In the UK, November’s Consumer Price Index (CPI) data shows annual inflation rising to 2.6%, up from 2.3% in October, while monthly inflation slowed to 0.1%, in line with expectations. Core services inflation, excluding volatile elements, rose from 4.5% to 4.7%, indicating persistent underlying price pressures.

EUR/GBP Outlook
EUR/GBP is expected to remain stable in the short term. However, an accelerated easing cycle from the Bank of England (BoE) next year could provide intermittent support to the pair.

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Conclusion

EUR/USD is likely to remain near 1.0500 through year-end, with a bearish outlook heading into 2024 as German growth concerns persist and potential policy shifts under Trump’s second term come into focus. EUR/GBP, meanwhile, is expected to stay range-bound, though future BoE decisions could influence direction.

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European Central Bank (ECB) Chief Economist Philp Lane said in an MNI interview on Wednesday that “it is prudent to maintain meeting-by-meeting approach.”

Additional takeaways

Also prudent not to pre-commit to any particular rate path.

Disinflation process is well on track.

Domestic inflation should come down.

Financing conditions remain restrictive.

Determined to ensure that inflation stabilises at 2%.

The argument for cutting by 50 bps was to show we are no longer restrictive.

Forward rates curve shows that delivering on 2% target requires more rate cuts to come.

Key Highlights:

• Silver prices drop to a two-week low of $30.30 during Tuesday’s European session.
• The decline comes as US bond yields extend gains ahead of the Federal Reserve’s (Fed) policy decision on Wednesday.
• The Fed is expected to reduce rates by 25 basis points (bps) to 4.25%-4.50%, but its outlook may indicate fewer rate cuts in 2025.

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Market Drivers

1. Rising US Bond Yields
   • 10-year Treasury yields climb for the seventh consecutive day, nearing 4.42%.
   • Higher bond yields increase the opportunity cost of holding non-yielding assets like Silver, pressuring prices further.
2. Hawkish Fed Expectations
   • According to a Bloomberg survey, the Fed is expected to implement a gradual rate-cutting cycle, with three rate cuts projected in 2025.
   • Economists are focusing on rising inflation risks over potential employment concerns, influencing the Fed’s cautious stance.
3. US Dollar Strength
   • The US Dollar Index (DXY) gains traction around 107.00, adding to Silver’s downside pressure.
4. Fed Chair Powell’s Press Conference
   • Investors await insights from Powell on the potential impact of policies from incoming US President Donald Trump, including immigration, trade, and tax measures, on inflation and future interest rates.

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Technical Analysis

• Current Trend: Silver prices remain under pressure after breaking below the 20-day Exponential Moving Average (EMA) at $31.00.
• RSI Reading: The 14-day Relative Strength Index (RSI) is range-bound between 40.00-60.00, suggesting limited directional momentum.

Key Levels to Watch:

• Support: The upward-sloping trendline near $29.50, originating from the February low of $22.30, is critical for sustaining the current trend.
• Resistance: Horizontal resistance at $32.50, derived from the May 21 high, remains a significant barrier to upside moves.

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Conclusion

Silver prices are likely to remain subdued in the near term, with rising bond yields and Fed policy expectations adding downward pressure. Investors will closely monitor Powell’s remarks for clues on future monetary policy, inflationary trends, and their potential impact on Silver. A break below $29.50 could signal further declines, while a recovery above $32.50 might revive bullish momentum.