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Turkey’s troubles and the threat of contagion were the main factors pushing the euro around last week, but the ECB might put the focus back to policy this time.

Euro zone PMIs (Aug. 23, starting 7:00 am GMT)

The top dogs of the euro region, namely Germany and France, will be printing their manufacturing and services PMIs on Thursday’s London session.

Although these figures don’t usually lead to strong directional moves for the shared currency, it’s helpful to note how the numbers generally turn out because these are leading indicators of economic health. Readings above 50 indicate industry expansion, and the August figures are projected to stay above that level.

Furthermore, small gains are eyed across the board, with the exception of the German manufacturing PMI, which is slated to dip from a downgraded 56.9 figure to 56.5. The region’s overall manufacturing and services PMIs are projected to more or less hold steady.

ECB monetary policy meeting accounts (Aug. 23, 11:30 am GMT)

On the same trading session, the ECB will release the minutes of their latest monetary policy decision. If you recall, the central bank kept policy unchanged as expected but the announcement and presser generated a mostly bearish reaction.

While ECB head Draghi and his men confirmed that the taper will proceed as planned and signaled a more upbeat inflation outlook, selling ensued when they confirmed that market expectations are in line with the ECB’s bias. This implies that rates would stay on hold until September 2019, contrary to what other ECB members suggested earlier on.

The transcript of their actual discussion should shed more light on what most policymakers have in mind and probably give market watchers a better idea of whether or not an earlier hike is possible.

Headlines on Turkey

If last week’s price action is any indication, it’s that any update on Turkey’s economic situation is bound to have an impact on euro and franc action, regardless of whether the development is real or fake news.

So far, Turkey still has no intention to release Andrew Brunson, likely inviting more threats and actual sanctions from the U.S. government. Escalation could lead to another wave lower for the lira, which might revive contagion fears and remind traders of European banks’ exposure to Turkish debt. 

On the flip side, more words of reassurance from Turkey’s officials when it comes to stemming the currency’s decline or providing liquidity could keep risk aversion in check.

Last Week’s Price Review

The Euro

The euro is on track for a fourth week of net losses since it’s currently the third worst-performing currency of the week (as of 1 pm GMT).

Overlay of EUR Pairs: 1-Hour Forex Chart
Overlay of EUR Pairs: 1-Hour Forex Chart

The euro started the week on a weak footing, apparently as an extension of last Friday’s slide, thanks to another bout of selling pressure on the Turkish lira due to combative statements from Turkish President Erdogan over the weekend, which raised concerns over a potential contagion effect because of the exposure of Euro Zone lenders to Turkey.

The euro finally got a chance to lick its wounds late into the Asian session, apparently because of easing Turkey-related worries after the Central Bank of the Republic of Turkey (CBRT) announced that it will cut reserve requirements and provide liquidity for Turkish banks, which stopped the Turkish lira’s slide.

And even more buyers came out of the woodworks during the morning London session. And as noted in Monday’s morning London session recap, that was apparently in response to this tweet.

And for those who don’t know, Andrew Brunson is a U.S. Christian pastor who was arrested back in 2016 on terrorism charges for allegedly aiding one of the individuals being accused of masterminding the 2016 coup attempt against Turkish President Erdogan.

And Brunson’s ongoing imprisonment has been was used by the U.S. last week as a pretext to slap sanctions against Turkey, so Brunson’s confinement is a source of political and economic uncertainty for Turkey, which raises a question mark on the Turkish lira’s stability. And that, in turn, is a source of uncertainty for European lenders who have exposure to Turkey.

Getting back on track, that tweet was later revealed to have been fake news, so buying pressure eventually ran out of steam.

The euro didn’t plunge headlong, however, likely because fears of a contagion effect were eased by the Turkish central bank’s earlier pledge to provide support to Turkish banks.

Unfortunately for the euro, sellers returned in force come Tuesday. And as noted in Tuesday’s London session recap, that was very likely due to renewed Turkey-related concerns since the euro got swamped by sellers when Turkish President Erdogan lashed out against U.S. sanctions and threatened to escalate economic and political tensions with the U.S. when he said the following in a speech:

“We will boycott US electronic products … If they have iPhone, the other side has Samsung. In our country there is Venus, Vestel.”

“They do not refrain from using the economy as a weapon against us, as they tried in the areas of diplomacy, military, or efforts for social and political instability.”

And Turkey did make good on those threats since Turkey later announced the imposition of additional tariffs on U.S. goods as a response to U.S. sanctions.

More bears came out of the woods to give the euro a good beating when a CNN report was released during Wednesday’s London session. You see, the report, uh, reported that the Turkish lower court has rejected Brunson’s appeal to be released from house arrest, adding that Brunson’s appeal will be heard by an upper court on October 12 and therefore confirmed that the tweet I mentioned earlier was fake news.

Incidentally, the broad-based selling pressure on Tuesday and Wednesday sent most EUR pairs below last week’s closing prices (dashed horizontal line).  And EUR so Erdogan and Turkey-related jitters are essentially the reasons why the euro is turning in another poor performance this week.

Moving on, the euro was finally able to pare some of its losses when the Greenback broadly weakened during Wednesday’s U.S. session, which some market analysts attributed to Qatar’s pledge to add $15 billion in direct investment to Turkey, as well as plans for German and Turkish officials to meet.

The euro then shaved off even more losses (except against AUD)  when the Greenback weakened further after Vice Minister of Commerce Wang Shouwen announced that China will meet with U.S. representatives in Washington for trade talks later this month.

The euro’s rise was soon capped, though, and most EUR pairs began to trade sideways. And unfortunately for the euro, most EUR pairs began trading sideways just below last week’s closing prices.

The Swiss Franc

The Swissy is currently mixed but a net winner (as of 1 pm GMT), so the Swissy is still on track for its fifth consecutive week of net wins.

Overlay of CHF Pairs: 1-Hour Forex Chart
Overlay of CHF Pairs: 1-Hour Forex Chart

As usual, EUR and CHF pairs have roughly similar price action. However, EUR and CHF pairs did diverge on some occasions.

To be more specific, EUR and CHF pairs reacted differently to the CBRT’s pledge to support Turkish banks since that sent the euro higher while slapping the Swissy lower.

The Swissy also found buyers when Turkish President Erdogan was talking smack about and threatening to retaliate against U.S. sanctions. But as mentioned earlier, Erdogan’s outburst caused the euro to tank.

As also mentioned earlier, the euro found buyers on most pairs when planned trade talks between the U.S. and China were announced. However, the Swissy found sellers instead. And selling pressure on the Swissy only ramped up as the day progressed since that announcement also inspired some risk-taking.

NZD/CHF (inverted, red) vs.  EUR/NZD (black): 1-Hour Forex Chart
NZD/CHF (inverted, red) vs.  EUR/NZD (black): 1-Hour Forex Chart
CHF/JPY (red) vs.  EUR/JPY (black): 1-Hour Forex Chart
CHF/JPY (red) vs.  EUR/JPY (black): 1-Hour Forex Chart
USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart
USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart