Political updates from Germany and a few remarks from ECB officials pushed the shared currency around last week, and progress in coalition talks led to weekend gaps. But will the ECB steal the show later on?
Euro zone PMIs (Jan. 24, starting 8:00 am GMT)
The top dogs of the European region, namely Germany and France, are gearing up to print their flash manufacturing and services PMI readings this week.
While these numbers don’t generally trigger a huge immediate reaction from the shared currency, it’s important to pay attention to the releases because they serve as leading indicators for business activity in the coming months. Besides, significantly stronger or weaker than expected readings could still push the euro in a particular direction for the day!
A brief scan of the consensus estimates reveals that analysts expect a slight dip in activity for both sectors in both countries, which might bring the euro zone flash manufacturing PMI down from 60.6 to 60.4 and the services PMI from 56.6 to 56.5.
ECB rate decision (Jan. 25, 12:45 pm GMT)
The main event for the euro this week might be the ECB statement as most market participants are starting to sense a hawkish shift from the central bank.
For one, economic data has been printing consistent improvements over the past few months. Apart from that, a few policymakers have hinted that they might end their bond purchases program later this year, paving the way for rate hike expectations.
But with high expectations typically come a higher chance for disappointment, which opens up the prospect of profit-taking during the actual event. Keep in mind that a number of officials are also expressing concerns about the currency’s appreciation and its impact on inflation.
Overall risk sentiment
If you’ll continue reading on the previous week’s recap below, you’ll find that the franc has been very taking advantage of dollar outflows and market sentiment.
With the U.S. government in shutdown mode for now, traders may be looking for safe-haven alternatives other than the dollar. As mentioned in my JPY update, pay attention to political updates that could push these lower-yielding candidates around!
Last Week’s Price Review
The euro is the third worst-performing currency of the week as of 2:00 pm GMT. The euro’s position could still improve, though, given that the euro’s loss to the yen and the Kiwi were only very minimal.
Having said that, none of the EUR pairs were able to break the 1.0% mark in terms of weekly % changes, which drive home the fact that weekly volatility on EUR pairs was very low.
Moreover, if you look at the overlay of EUR pairs above, you can see that most EUR pairs were trading roughly sideways and price action was rather messy on EUR pairs, with diverging price action to boot.
In other words, the euro was basically in consolidation mode this past week and was vulnerable to opposing currency price action.
But why was the euro mostly in a holding pattern this past week? Well, that’s very likely because traders are holding their breaths ahead of this Sunday’s German Social Democrats (SPD) Party Congress and next week’s ECB statement.
You see, Germany’s Der Spiegel broke the news on Tuesday that SPD members in Berlin voted against pursuing grand coalition talks with German Chancellor Angela Merkel.
And if you can still remember last week’s EUR recap, the euro was pushed higher partly because of expectations that the SPD will support a coalition government under Merkel.
However, the vote against a coalition government in Berlin began to cast doubts that support for coalition talks with Merkel have the full backing of the entire party, which caused the euro to slide and likely dampened demand for the euro throughout the week.
As for worries related to next week’s ECB statement, well, a Reuters report that cited “three sources close to the matter” was released on Tuesday. And report cited these sources as saying that ECB members supposedly “need more thorough analysis before making any change,” which dampened expectations for a change in tune in next week’s ECB statement.
These unnamed sources said that the March ECB statement would be the more likely time to communicate a change in policy stance, though, so the euro’s losses were limited.
Sadly for euro bulls, the euro encountered broad-based selling pressure again on Wednesday.
And as noted in Wednesday’s London session recap, that was due to the euro-bashing by ECB Governing Council Member Ewald Nowotny and ECB Vice President Vitor Constancio, which stoked worries that ECB Overlord Draghi, speaking for the ECB as a whole, will also talk down the euro in next week’s ECB statement.
And as I also highlighted in Wednesday’s London session recap, Constancio even appeared to affirm the Reuters report when he said that we “should not choke off growth too soon,” which heavily implies that the ECB won’t be making a move next week.
Anyhow, the euro will probably be a lot livelier next week, given the SPD Party Congress this Sunday and next week’s ECB statement, so do keep an eye on the euro.
The Swiss Franc
The euro is currently a net loser but the Swissy is a net winner. So have the Swissy and the euro kissed each other goodbye and parted ways?
Well, not exactly since price action on euro and Swissy pairs was rather similar, as you can see in the sample pairs below.
The Swissy did have a noticeable tilt to the upside compared to the euro’s more sideways price action, though. And this tilt became pronounce on Thursday when the Swissy clearly began to pull away from the euro.
Heck I even pointed out in Thursday’s London session recap that the Swissy outpaced all its peers despite the risk-on vibes at the time, which was rather wonky.
In hindsight, however, it’s likely that the Swissy was pushed higher because of safe-haven flows since fears of a U.S. government shutdown began to ramp up on Thursday.