The spotlight is on ECB head Draghi and his fellow policymakers as they announce their rate decision this week. But will this event be a dud?
ECB policy decision (Sept. 13, 11:45 am GMT)
No actual interest rate changes are expected during the ECB decision on Thursday’s London trading session. Not a lot of forex folks are expecting big surprises either, as ECB Governor Draghi hasn’t been keen on talking about their tightening time line during previous statements.
What many are keeping a lookout for is the central bank’s take on European banks exposure to Turkish debt, especially since the idea of contagion has been floated about in the past weeks. ICYMI, we’ve got a quick primer on the economic crisis in Turkey right here.
According to the Bank of International Settlements, Turkey owes European banks a grand total of $194 billion. Further depreciation in the lira could make it more difficult for their government to repay these obligations, which could set off a wave of defaults in the region.
Also keep in mind that this particular announcement comes with an updated set of economic projections, so any major changes in growth or inflation forecasts could push the shared currency in a strong direction.
Last Week’s Price Review
The euro was one of the stronger currencies this week. I say “was” because the euro is currently mixed but a net loser (as of 1 pm GMT), thanks to an influx of sellers on Friday.
The euro’s price action looks rather chaotic and there are even clear instances of diverging price action on EUR pairs, which implies that the euro was somewhat vulnerable to opposing currency price action.
Wait a second … I’m getting a sense of déjà vu. Oh, that’s right! The euro also behaved the same way last week.
Anyhow, if we strip EUR/GBP and EUR/NZD from the overlay, then we can see that, well, the euro’s price action is still actually a bit messy.
However, we can also see that EUR pairs did have somewhat uniform price action, so the euro wasn’t just a mere victim of its peers.
Having noted that, Italy-related news already had an impact on the euro’s price action last week.
And this week, Italy seems to have taken center stage since the euro appears to have been buoyed this week, largely because of assurances from Italian government officials that Italy will play nice with the E.U. by following the E.U.’s budget rules.
That was before the euro got mauled by sellers on Friday, though.
As for specifics, the euro had a steady start but began finding buyers across the board during Tuesday’s U.S. session. And that was apparently because of a statement from the League party that they’ll follow the E.U.’s budget rules, which is kind of a big deal since the League is a member of the ruling coalition government and is usually painted as a right-wing, populist, and anti-EU party.
The euro got slapped lower on Wednesday, though, possible because of profit-taking since the apparent catalyst for the euro’s slide was Italian Deputy Prime Minister Matteo Salvini’s announcement that top Italian officials were headed for budget talks.
Another possible reason is that the euro was reeling because the Greenback got its second wind back then.
At any rate, dip demand not notable and the euro’s slide quickly ran out of steam. And as noted in Wednesday’s London session recap, that may have been due to assurances from Deputy Prime Ministers Salvini and Di Maio that Italy will place nice with the E.U. ahead of and after budget talks.
The euro also appears to have gotten a boost when a Reuters report claimed that the Christian Social Union (CSU), sister party of Angel Merkel’s Christian Democratic Union (CDU), supposedly want the ECB to tighten monetary policy faster.
And more euro bulls came out of the woodworks later on when a Bloomberg report was released during Wednesday’s U.S. session, claiming that the U.K. and Germany are supposedly ready to drop key demands in order to hammer out a Brexit deal.
After that, the euro’s price action became a bit more mixed, but there was enough buying pressure to keep most EUR pairs above last week’s closing prices (dashed horizontal line). And market analysts attributed that to relief over the Italian government’s assurances that Italy will follow the E.U.’s fiscal rules.
The euro would get a final bullish boost on Friday. And as noted in Friday’s London session recap, that was apparently due to Italian Economy and Finance Minister Giovanni Tria’s comment that Italy will follow the E.U.’s budget rules, while also stating that Italy will respect its commitments to Europe.
That was the last hurrah from EUR bulls, however, since the euro began to turn broadly lower after that. And as also noted in Friday’s London session recap, there were no direct negative catalysts for the euro, so I conjectured that euro bulls may have been taking some profits off the table.
However, I also pointed out that the euro began to encounter sellers at the same time as the pound began to spike higher because of the transcript of Barnier’s discussion with the U.K. Parliament, so I also considered the possibility that market players were loading up on the pound at the euro’s expense.
The euro also got a noticeable kick when the better-than-expected U.S. NFP report was released, so market players were also likely flocking to the Greenback at the euro’s expense.
The Swiss Franc
The Swissy is currently the one currency to rule them all (as of 1 pm GMT), which is a repeat of last week’s performance. This week’s win will also mark the third consecutive week of net wins for the Swissy.
EUR and CHF pairs had roughly similar price action for the most part (as usual). Interestingly enough, the euro actually outperformed the Swiss for most of the week.
However, that changed during Thursday’s U.S. session since the euro was steady and somewhat mixed at the time, but the Swissy was clearly in demand, likely because of safe-haven demand for the Swissy, given the risk-off vibes at the time.
Moreover, the Swissy wasn’t dragged lower when the euro weakened on Friday, likely because the Swissy was cushioned by the risk-off vibes on Friday.