The spotlight could be on the ECB minutes this week as euro traders are looking for clearer policy direction. Meanwhile, the franc might keep taking cues from sentiment.
ECB monetary policy meeting accounts (May 24, 11:30 am GMT)
The latest set of comments from ECB officials were as mixed as Yanny-Laurel opinions, although most still seem to favor an end to the QE program later this year and could definitely hear “Laurel”.
ECB Executive Board Member Coeuré clarified that tightening might have to wait a bit longer even after the stimulus program ends while another ECB official Francois Villeroy de Galhau hinted that the market can expect a rate hike “at least some quarters but not years” after QE.
With that, euro traders will try to gauge where majority of policymakers are leaning, noting that recent data points haven’t been as impressive as usual.
Italy’s draft deal updates
Headlines on Italy’s coalition government have been a pretty huge deal in the previous week, especially when the leak of the draft deal was released and indicated provisions on debt forgiveness.
Even though an agreement has already been struck, it’s worth noting that both the 5-Star Movement and the League party are openly anti-E.U. so they could bring breakup vibes back to the table.
Last Week’s Price Review
The euro is presently on course to closing out as this week’s second biggest loser after the yen (as of 1 pm GMT), which would mark the third consecutive week of net losses for the euro.
The euro actually had a promising start. And as noted in Monday’s morning London session recap, euro pairs got a noticeable bullish kick when ECB Executive Board Member Francois Villeroy de Galhau hinted that the ECB may be ending its QE program before the year ends while also saying that the market can expect a rate hike “at least some quarters but not years” after the QE program ends.
The euro was later forced to return its early gains, however, thanks to Greenback demand getting revived and ECB Executive Board Member Coeuré’s comments that appeared to contradict Villeroy’s earlier hawkish comments.
After that, the euro got stomped hard on Tuesday. The euro’s slump started during Tuesday’s London session. And as noted in Tuesday’s London session recap, there weren’t really any direct catalysts for the euro’s slide so market analysts were blaming the euro’s weakness on the Greenback’s strength.
A catalysts would later appear during the U.S. session, though, namely an alleged leaked draft of the 5 Star/League agreement since the alleged draft included plans to ask the ECB to forgive €250 billion worth of Italian debt, as well as plans to propose “economic and judicial procedures that allow member states to leave monetary union.”
The euro then continued to steadily sink after that before getting swamped by another wave of sellers during Wednesday’s London session. And as pointed out in Wednesday’s London session recap, there was no negative catalysts for the euro’s slide so market analysts blamed the euro’s slide on political uncertainty because of the leaked draft deal, as well as Greenback strength.
Moving on, the euro would finally find support during Wednesday’s U.S. session. And the apparent catalyst was a comment from League economic adviser Claudio Borghi that debt forgiveness was not part of the deal, invalidating the earlier rumors based on the leaked draft.
The euro then began trading roughly sideways after that before getting a final bearish kick when the 5-Star Movement and the League party of Italy announced that they have finalized a deal to form a coalition government.
The announcement should have reduced political uncertainty a bit. But as highlighted in Friday’s London session recap, both the 5-Star Movement and the League party are openly anti-E.U.
Also, the provisions of the deal itself are also a source of uncertainty seen some provisions are seen as being a cause of conflict with the E.U., particularly the provisions with regard to “billions of euros in tax cuts, additional spending on welfare for the poor, and a roll-back of pension reforms,” as well as provisions that “called for a review of EU governance and fiscal rules” as a Reuters report puts it.
The Swiss Franc
After last week’s mixed performance, the Swissy definitely put an end to its losing streak since it’s this week’s top-performing currency (as of 1 pm GMT). Did that surprise you?
The Kiwi’s win against the Greenback is very small, though, so there’s still a chance that the Swissy may lose out to the Greenback since the trading day’s is far from over.
So, did EUR and CHF pairs finally part ways after dancing in tandem for so long?
Well, they actually still had similar price action. Although there was a decoupling during the later half of Tuesday, the early half of Wednesday, and Friday, as marked in the sample pairs below.
The decoupling on Tuesday and Wednesday was likely due to the euro getting weighed down by USD strength and that leaked draft deal. However, risk aversion was the dominant sentiment at the time and the leaked draft deal was also a source of uncertainty, which is likely why the safe-haven Swissy actually gained ground against everything on Tuesday (except the Greenback) and was not as vulnerable as the euro on Wednesday.
Friday is a similar story since risk aversion prevailed in Europe and the euro was weighed down by the announcement that the Eurosceptic 5-Star Movement and the League party announced that they have finalized a deal to form a coalition government in Italy.