Disappointment from Draghi cramped the euro’s style last week while the franc turned in a mixed performance. What do this week’s catalysts have in store?
Medium-tier euro zone data
It’s all about flash figures from the euro zone nations this week! I’m talkin’ preliminary readings for the GDP and CPI from top dawgs like Germany and France, as well as estimates for the entire region.
While these releases don’t usually push the shared currency in a particular direction, it’s always helpful to take note of how the actual numbers turn out to gauge if the economy is keeping up its consistent improvements. No matter how Draghi tries to downplay rate hike expectations, the numbers could provide better clues on what the ECB’s next moves might be.
In particular, keep close tabs on the euro zone flash CPI estimates due on Tuesday’s London session. The headline figure could stay unchanged at 2.0% but the core reading might tick higher from 0.9% to 1.0% to reflect slightly stronger price pressures.
Overall market sentiment
As in previous weeks, risk sentiment tends to hog all the market attention, especially since safe-havens and higher-yielders tend to react strongly to trade-related headlines.
With that, any positive developments like the Trump-Juncker trade truce early last week could bring in more demand for riskier commodity currencies, which tends to be bearish for the lower-yielding franc and sometimes the euro.
Last Week’s Price Review
The euro is this week’s biggest loser (as of 1 pm GMT). As usual, the euro’s price action wasn’t very uniform, which implies that the euro is still somewhat vulnerable to opposing currency price action.
Having said that, most euro pairs do have a downward tilt for most of the week, except for the brief rise during Wednesday’s U.S. session.
This become clearer if we remove EUR/AUD from the overlay of EUR pairs.
As you can see in the chart above, the euro’s price action is indeed mixed and messy, but sellers were evidently present since most EUR pairs were broadly trending lower.
But why was the euro under pressure? Well, there’s actually no apparent reason, but preemptive positioning and/or unwinding of EUR longs ahead of the trade meeting between U.S. President Trump and European Commission President Jean-Claude Juncker and the ECB statement are likely reasons.
Another likely reason is that last week’s “big picture” theme is still in play, namely monetary policy divergence between the Fed and the ECB.
Speaking of the ECB, the euro didn’t really react to the ECB statement since the ECB didn’t really make any changes to its monetary policy and its forward guidance.
As for the ECB presser, the euro’s initial reaction was to jump higher since ECB Overlord Draghi gave a rather upbeat assessment and outlook on the Euro Zone economy.
However, bear later came out of the woods to give the euro a good thrashing during the Q&A portion.
You see, Draghi was asked to further clarify the ECB’s forward guidance that rates ain’t moving “through the summer of 2019” and the Draghster answered as follows:
“[A]s far as pure expectations are concerned, they are very well aligned with the anticipation of the Governing Council that policy rates will remain at their current levels through the summer of next year. Surveys of market views confirm this very tight alignment.”
Draghi’s comment was taken by market analysts to mean an October 2019 rate hike (at the earliest), which is a rather dovish forward guidance, especially since the Fed has been hiking rates and is expected to continue doing, which highlights the monetary policy divergence between the Fed and ECB.
Backtracking a bit to the Trump-Juncker meeting on Wednesday, the euro got bid higher across the board when Trump and Juncker expressed cautious optimism before their meeting started.
However, the euro’s price action quickly diverged since risk-taking ramped up as trade-related jitters began to fade, forcing the euro to cede ground to all the comdolls.
The euro won against everything else, though, so the euro did benefit from the event. And when rumors began to spread that the meeting was positive for both the E.U. and the U.S., the euro powered up and not even the comdolls were able to resist the euro’s advance.
The euro’s rise got cut short when Trump and Juncker officially announced that they hammered out a deal to de-escalate their trade spat and start negotiations to lower trade barriers, however, likely because of profit-taking. Basically, a “buy the rumor, sell the news” scenario played out.
Moreover, market players were likely taking profits off the table as their focus shifted towards the ECB statement and presser. And as already discussed, the ECB statement was a dud but the ECB presser put the hurt on the euro.
The Swiss Franc
The Swissy is turning in a mixed performance this week (as of 1 pm GMT). It’s currently a net loser, though, which is a rather poor run since the Swissy was last week’s champion.
However, the week’s not yet over and the Swissy only barely won out against the Aussie and Kiwi. In addition, the Swissy is encountering sellers across the board, so there’s a chance that the Swissy’s final ranking would be worse.
Looking at the sample pairs below, it’s pretty clear that the Swissy was also encountering sellers, but it’s also clear that the Swissy wasn’t as vulnerable as the euro.
However, the main reason why the Swissy fared better than the euro this week is that the Swissy caught a bid during Thursday’s London session.
And as noted in Thursday’s London session recap and as marked on the chart above, that was apparently a reaction to the ECB statement, which is kinda weird. Perhaps traders were wary of what ECB Overlord Draghi had to say during the presser and were flocking to the Swissy? But then again, there were also early signs that risk aversion was returning. And risk aversion did return during Thursday’s U.S. session.
Risk-taking returned on Friday, though, which put the hurt on the safe-haven Swissy, although it’s also possible that the SNB may have been sneakily weakening the Swissy after the Swissy’s wonky rise on Thursday.