Can Italian budget troubles keep weighing on the shared currency this week or can it move on to other matters? Here are some things to watch out for.
Top-tier data from top economies (starting Oct. 30, 6:30 am GMT)
Throughout the week, the region’s largest economies will be printing their major economic figures and slowly giving traders a clue how the overall readings might turn out.
First up, we’ve got the French flash GDP and German preliminary GDP due on Tuesday’s London trading session. Analysts expect the former to show stronger Q3 growth of 0.4% versus the earlier 0.2% expansion while the latter might print a meager 0.1 % uptick in price levels.
Spain will also be printing its flash CPI later in the day while Italy will release its preliminary GDP reading, which might indicate another 0.2% growth figure. These should be enough to give market watchers an inkling of how the euro zone’s preliminary Q3 GDP figure might turn out, although estimates are for a slightly faster pace of growth at 0.4% versus the earlier 0.3% result.
Wednesday has German retail sales, French preliminary CPI, and the Spanish flash GDP due, but traders could hold out for the release of the flash headline and core CPI readings for the entire region. After all, ECB policymakers sounded pretty confident about their inflation outlook during the latest policy decision, so it’ll be interesting to see if the actual numbers do hold up.
Number crunchers expect the headline figure to hold steady at 2.1% while the core version could tick higher by a notch from 0.9% to 1.0%, highlighting the view that underlying inflation is advancing.
More from Italy
Talks between the European Commission and Italy’s government are already underway, and so far remarks from both sides have been diplomatic. Then again, this might just be the calm before the storm as Brussels has given the thumbs-down on the country’s spending plans after all.
Word is that EC officials are hoping to discuss Italy’s draft budget in their November 5 meeting but that country leaders are asking for an extension. Keep in mind that Italy has until November 13 to make revisions on the budget and hopefully score an approval by then.
Some warn that the lack of agreement among Italy’s political party leaders themselves could pave the way for a financial crisis that could be worse than that of Greece. That said, do watch out for rising bond yields and widening spreads, which could keep jitters in play for the shared currency.
Last Week’s Price Review
The euro is headed for its second week of net losses since the euro is currently in third-to-last place (as of 1 pm GMT).
And this week’s bout of weakness is due to concerns surrounding Italy’s budget, weaker growth prospects because of disappointing Bundesbank and PMI reports, and lowered rate hike expectations in the wake of the ECB presser.
The euro actually had a promising start. There were no apparent catalysts, but relief over Moody’s decision to not to downgrade Italy’s outlook from “stable” was cited as one of the reasons for the risk-friendly vibes on Monday. And that may have also fueled demand for the euro.
And more sellers would attack during the Monday’s morning London session, apparently because the Bundesbank warned that Germany’s growth may have stalled in Q3, as well as Italian Economy Minister Giovanni Tria’s response to the E.U.’s warning letter, which was basically a defense of Italy’s budget as well as a statement that Italy is sticking to its budget plan.
As for specifics, Tria said that:
“[The budget] was a hard, but necessary decision in light of Italy’s delay in catching up to pre-crisis levels of GDP and the desperate economic conditions in which the most disadvantaged citizens find themselves in.”
“The government trusts that what it has explained is sufficient to clear up the setup of its budget and that the [fiscal] law will not put at risk the financial stability of Italy or other EU state members.”
The euro drifted lower for a while after those events, but became more mixed when Monday’s U.S. session rolled around.
After that, the euro traded mostly sideways on Tuesday and didn’t really react to the European Commission’s rejection of Italy’s budget, likely because a rejection was widely expected.
Sellers would return during Wednesday’s London session, however, thanks to combative comments from Italian Deputy PM Matteo Salvini, as well as a bunch of disappointing PMI reports for Germany, France, and the Euro Zone as a whole.
The euro’s price action would become more mixed when Wednesday’s U.S. rolled around, though, since the euro began to recover against the pound, the Kiwi, and the Aussie, while losing even more ground to everything else.
And when Thursday rolled around, the euro’s price action was still mixed in the run-up to the ECB statement and presser.
Speaking of the ECB statement, that was essentially a dud since the ECB didn’t really say anything new. However, the ECB presser pushed the euro higher initially since ECB Overlord Draghi revealed that the ECB thinks that risks to the Euro Zone’s growth prospects remain “broadly balanced”.
Draghi even said during the first half of the Q&A portion that:
“[W]e have no sense that we should doubt our confidence that inflation is gradually converging to our aim.”
However, Draghi warned during the later half of the Q&A portion that:
“The fact is that our monetary union remains fragile [partly because of developments Italy].”
And with regard to Brexit, Draghi said that:
“We certainly are monitoring and working together with the Bank of England to identify potential risks of a sudden hard Brexit event.”
“If this lack of outcome of solution will continue and will approach the end date, the private sector itself will have to prepare on the assumption that there will be a hard Brexit.”
However, Draghi also tried to sound optimistic on Brexit when he said that:
“By and large, I’m still confident that a good common-sense solution will be found where financial stability risks will be minimised.”
Draghi’s warning on Italy and Brexit likely weighed on the euro since the euro began encountering sellers during the second half of the Q&A portion of the presser.
Also, market analysts later developed a narrative that the ECB’s plans to tighten monetary policy would be a bad idea, given the political and economic risks presented by Brexit and Italy. And that may or may not have weighed down on the euro.
At any rate, follow-through selling was only limited and the euro eventually found support on most pairs before becoming more mixed.
The euro’s price action became uniform again come Friday. Sadly for EUR bulls, the euro moved uniformly lower.
And as noted in Friday’s London session recap and as marked on the overlay of EUR pairs, the apparent catalyst was the ECB’s Q4 2018 ECB Survey of Professional Forecasters since that yielded disappointing results.
Reuters also released a report during the session and it highlighted that odds for a September 2019 ECB rate hike now only stood at 50% in the wake of the ECB presser, down from 90% back on Monday.
The Swiss Franc
After six consecutive weeks of net losses, the Swissy may soon be joining the winning side since the Swissy is currently mixed but a net winner (as of 1 pm GMT).
The euro is currently a net loser while the Swissy is on track to closing out the week as a net winner. Did the euro and Swissy finally part ways? Nope!
As you can see in the sample pairs below, CHF and EUR pairs still have roughly similar price action.
There were instances when the euro and the Swissy decoupled that. And those allowed the Swissy to outperform the euro.
The first instance of decoupling happened on Monday since the euro got whupped because of the Bundesbank report and Italy’s reply to the E.U.’s warning letter, but the Swissy actually began tilting higher after the Bundesbank report was released and after Tria delivered Italy’s response.
The second instance happened on Wednesday. Well, the euro and the Swissy didn’t really decouple. The euro just took more hits because of the disappointing PMI reports while the Swissy only tumbled a bit.
And the final instance of decoupling happened on Thursday since the euro continued to encounter sellers in the wake of the ECB presser, but the Swissy quickly bounced back after the initial drop.