Apart from industry PMI readings, there’s not much in the way of top-tier data due from the euro zone this week. Will the focus return to Italy?
Flash PMI readings (Sept. 21, starting 7:00 am GMT)
While the ECB statement last week was generally more upbeat than usual, traders would likely want to get some confirmation from economic data because like Shakira’s hips, the numbers don’t lie.
PMI readings tend to serve as leading indicators of economic performance because businesses adjust their operations based on market conditions and expectations. No less than the top two economies of the region, Germany and France, will be releasing their flash manufacturing and services PMIs.
On the manufacturing front, slight dips are eyed for both economies, with the French figure expected to fall from 53.5 to 53.3 and the German reading likely to drop from 55.9 to 55.8. As for the services sector, France could report no change to its 55.4 figure while Germany could report an uptick from 55.0 to 55.1.
Political updates in Italy
Although the ECB dismissed spillover risks from Italy, there’s no denying that the country’s political situation is still one big mess. Last time I checked, Mario Nava, the head of Italy’s market watchdog Consob, turned in his resignation papers.
Euro traders are turning their attention on the upcoming release of the Italian government budget and mounting pressure on Minister of Economy and Finances Giovanni Tria to quit his post as well.
EU Summit in Austria (starting Sept. 20)
Brexit is expected to be the main topic on the table during the pow-wow among European officials, including U.K. PM May herself. What most market participants might be interested to find out is whether or not the rumored special Brexit summit in November would be confirmed.
Apart from that, comments from EU officials should also give forex junkies a better idea of how negotiations are going and the odds of a “no deal” situation.
SNB decision (Sept. 20, 7:30 am GMT)
Now before y’all think this might be just another uneventful or purely risk-driven week for the franc, lemme tell ya that it’s bound to take center stage on Thursday’s London session as the SNB will announce their policy decision then.
Heck, franc price action might even pick up leading to this event as many are expecting stronger jawboning from head honcho Jordan and his fellow policymakers! SNB folks do know how to pull a surprise, after all.
You see, the Swiss central bank has been stepping on the gas when it comes to talking down the franc in the past few months while EUR/CHF seemed unstoppable in its dive. The pair has tumbled further since the earlier SNB statement, so policymakers might put the pedal to the metal this time. Better watch out!
Last Week’s Price Review
The euro edged out a win against the Aussie and is currently on track to closing out the week in third place (as of 1 pm GMT).
This week’s top events for the euro were the ECB statement and the ECB presser.
The ECB statement was practically a dud since the ECB didn’t really say anything new. However, ECB Overlord Draghi’s presser clearly spurred demand for the euro, likely because Draghi sounded rather optimistic.
Sure, Draghi expressed some concern about trade when he said that:
“[U]ncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently.”
“Certainly the major source of uncertainty that we see in global output comes from the rising protectionism.”
But with regard to the Euro Zone economy, he had these positive things to say:
“The incoming information, including our new September 2018 staff projections, broadly confirms our previous assessment of an ongoing broad-based expansion of the euro area economy and gradually rising inflation.”
“The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases.”
Aside from relief because of Draghi’s optimistic views, it’s also very likely that the euro shot up because a “sell the rumor, buy the news” scenario played out.
You see, the ECB actually downgraded its growth forecasts. But as mentioned in Wednesday’s London session recap (and as you can see on the overlay), most EUR pairs began encountering sellers after Bloomberg released a report warning that the ECB will downgrade its growth forecasts, with trade-related uncertainties being cited as the main reason for the downgrades.
Well, the ECB did downgrade its growth forecasts. And as Draghi explained in the presser:
“That [rising protectionism] is the major source of uncertainty which, by the way, is reflected in the current macroeconomic projections only to the extent of the measures that have been implemented already.”
The Bloomberg report was therefore right on the money. And euro bears who opened preemptive positions may have been enticed to cover some of their shorts and enjoy their profits.
Moving on, the ECB presser isn’t the only reason for the euro’s good performance this week.
As you can see on the overlay of EUR pairs, the euro actually had a promising start. And it’s that bullish boost on Monday that pushed EUR pairs (except EUR/GBP) above last week’s closing prices (dashed, horizontal line).
So, what happened on Monday? Well, the euro actually began attracting buyers during Monday’s London session.
But as noted in Monday’s London session recap, there were no direct catalysts for the euro’s strength, so I conjectured that last week’s theme, namely Italy-related optimism, may have helped to drive the euro higher since there was a lot of hubbub about Italian Economy and Finance Minister Giovanni Tria’s comment over the weekend that:
“As the (Italian) government puts words into actions, the (bond yield) spread will return to more normal levels.”
The euro did get a catalysts of sorts during Monday’s U.S. session since the euro was apparently a beneficiary of easing Brexit-related worries after E.U. Chief Brexit Negotiator Barnier said the following:
“I think that if we are realistic we are able to reach an agreement on the first stage of this negotiation which is the Brexit treaty within six or eight weeks.”
As side note, the euro dipped a bit on Friday after ECB Member Jan Smets stressed that normalizing the ECB’s monetary policy would be a “very gradual process.”
Smets’ comment pushed EUR/CAD below last week’s close, but the majority of the other EUR pairs were still doing well and good.
The Swiss Franc
The Swissy is on the opposite end of the spectrum since it’s currently in third-to-last place (as of 1 pm GMT). And if the Swissy can’t improve its ranking by the end of the day, then the Swissy will be saying goodbye to its three-week winning streak.
As always, EUR and CHF pairs had somewhat similar price action. But as you can see in the sample pairs below, there was a very clear decoupling on Monday. And since the Swissy wasn’t able to close the gap, that decoupling is the reason why the Swissy is lagging behind the euro this week.
What’s up with that? Well, as noted in Monday’s morning London session recap, the Swissy was reeling in pain because of the risk-friendly vibes and market analysts zeroed in on Giovanni Tria’s comment over the weekend that I already mentioned when we discussed the euro.
Other than that, the euro also enjoyed a bullish boost because of Barnier’s comment, but that really didn’t do anything for the euro.