Euro Shrugs Off Better German Sentiment, Yen Maintains Strength
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Euro Shrugs Off Better German Sentiment, Yen Maintains Strength

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Azeez Mustapha

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The Euro shrugs aside better-than-expected economic mood data from Germany. After today’s surge, the yen is holding steady, and the dollar is following suit. On Tuesday, Klaas Knot, an ECB policymaker, warned that the prerequisites for a rate hike in 2022 are very unlikely to be met.

Germany’s ZEW economic sentiment index rose from 22.3 to 31.7 in November, much higher than the expected 20.3. This is also the first rise since May. However, the current situation deteriorated again, dropping sharply from 21.6 to 12.5, which was much lower than the expected 19.4.

The Eurozone ZEW economic sentiment index rose from 21.0 to 25.9, higher than the expected 20.6. The current situation has dropped -4.3 points to 11.6. Eurozone inflation expectations fell sharply by -31.4 percentage points to -14.3. This shows that experts expect the inflation rate in the eurozone to decline in the next six months.

“Financial market experts are more optimistic about the next six months. However, the economic situation assessment once again shows that the experts believe that the supply bottleneck of raw materials and intermediate products and the high inflation rate will have a negative impact on economic development this quarter. For 2022 In the first quarter, they expect that growth in Germany and the Eurozone will pick up again and inflation will fall,” ZEW President Professor Achim Wambach commented on current expectations.

In addition, Germany’s September trade surplus narrowed to 13.2B euros, compared to 14.2B euros expected. France’s trade deficit slightly widened to -6.8B Euro, while the expected -7.0B Euro.

Euro Gains Ground Amid Continued USD Selling Pressure

The Euro edged higher for the third consecutive day on Tuesday and built on a mild rebound from the lowest level since July 2020. This was a reaction to Friday’s optimistic US non-agricultural employment report.

After the Fed’s dovish outlook, the U.S. dollar remains on the defensive and is further pressured by a new round of decline in US Treasury yields. In turn, this is seen as a key factor driving the euro/dollar pair, although a combination of multiple factors limits further gains.

The Fed said last week that policymakers are not in a hurry to raise borrowing costs. However, investors seem to believe that the US Central Bank will be forced to adopt a more active policy response to curb persistently high inflation. A series of hawkish comments from FOMC members overnight further contributed to this speculation, suggesting that the central bank may raise interest rates before the end of 2022. This, combined with the softening of the risk tone, helped limit the loss of safe-haven dollars.

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