The euro dropped to a near two-month low of $1.0687 after ECB Governing Council member Rehn hinted at a potential bias towards additional easing this year. Deteriorating risk sentiment led to declines in European equities and a rise in European government bond yield curves, mirroring global trends. The OAT-Bund spread increased to 76.8bps, adding more pressure on the common currency.
Earlier on Wednesday, the euro was already under pressure as the latest survey showed an unexpected drop in German consumer morale for the first time in five months. The GfK Consumer Climate Indicator fell to -21.8 heading into July, down from -21.0, and sharply missing the market consensus of -18.9. Both income expectations and economic prospects declined significantly, leading to a surge in the tendency to save while the propensity to buy remained low. This report marks the third survey this month that has fallen short of expectations, indicating a challenging path to recovery. Despite these challenges, we still expect the German economy to avoid stagflation in the second half of the year.
In the broader FX market, the Japanese yen weakened to a record low of 171.60 against the euro, raising concerns about potential intervention by Japanese authorities to support the struggling currency. Today's US jobless claims numbers and the US presidential debate could impact markets ahead of Friday’s PCE report and the French election vote on Sunday. As the week progresses, EUR/USD is trading at the bottom of its one-month range. With short-term risks leaning to the downside, persistent euro weakness could push EUR/USD to test the April lows around $1.0620.
