EUR/USD Slumps as Germany Enters Recession; Dollar Boosted by Safe-Haven Demand

Highlights

• Euro falls as Germany confirms recession, dollar gains as safe-haven.
• Fitch places U.S. debt ratings on negative watch due to debt ceiling concerns.
• Dollar supported by reduced rate cut expectations, upward inflation risks.

Overview

The Euro is down against the U.S. Dollar on Thursday due to Germany, Europe’s largest economy, confirming its recession, while the greenback reached a two-month high, benefiting from increased demand as a safe-haven currency amid concerns about a potential U.S. default.

At 13:42 GMT, the EUR/USD is trading 1.0710, down 0.0041 or -0.38%. The Invesco CurrencyShares Euro Trust ETF (FXE) is at $98.95, down $0.32 or -0.33%.

US Debt Ratings on Negative Watch

Fitch, a rating agency, raised concerns by placing the United States’ “AAA” debt ratings on negative watch. This indicates a possible downgrade if lawmakers fail to agree on raising the $31.4 trillion debt ceiling. The deadline for a resolution to the debt ceiling talks is approaching, with only a week left before the June 1 “X-date,” when the Treasury warned it may not be able to meet all its financial obligations.

US Debt Ceiling Concerns and Eurozone Economic Weakness

The dollar has gained from the demand for safe-haven currencies, especially since there is limited time to resolve the debt ceiling issue. This week has been characterized by a risk-off sentiment, favoring the dollar overall. Simultaneously, signs of economic weakness in Europe, particularly in Germany, have pushed the euro lower against the dollar.

Germany’s economy contracted slightly in the first quarter, entering a recession after experiencing negative growth in the fourth quarter of 2022. Despite Germany not representing the entire eurozone, the economy’s momentum is notably weak, as indicated by this week’s Ifo and PMI data.

Dollar Gains as Rate Cut Expectations Diminish

Additionally, the U.S. dollar has been supported by a decrease in expectations for Federal Reserve rate cuts this year. The American economy has proven resilient to the impact of the central bank’s aggressive tightening measures until now.

Traders have adjusted their projections for Fed rate cuts, reducing them to just a quarter point in December, compared to the previous estimation of up to 75 basis points.

Furthermore, the likelihood of another quarter-point interest rate hike in June has increased to approximately 1-in-3, following recent hawkish comments from several Fed officials and the minutes from the latest Fed meeting, which highlighted the majority of policymakers seeing upward risks to inflation.

Global Risk Aversion Boosts Strong US Dollar

Currently, the main driving factors are global risk aversion and adjustments in the U.S. forward curve, both contributing to the strength of the U.S. dollar. Even if a deal is reached regarding the debt ceiling and risk appetite returns, it is unlikely for the current strength of the U.S. dollar to completely reverse.

Technical Analysis

The EUR/USD is trading on the weakside of 1.0834 (S1) on Tuesday, putting it in a bearish position. This level is new resistance.

If sellers continue to emerge and there is an acceleration to the downside then look for the move to possibly extend into 1.0657 (S2).

Overcoming and sustaining a rally over 1.0834 (S1) will signal the return of buyers. This could generate the upside momentum needed to retest the PIVOT at 1.0965 over the near-term.

For a look at all of today’s economic events, check out our economic calendar.