Even though Italy’s debt issues just won’t quit, there were a number of factors pushing the euro around in the past few days. Can a stronger theme emerge this time?
Brexit deal debates (starting Dec. 4)
Yep, you’re still reading the weekly forecast for EUR & CHF! Brexit debates are worth mentioning here, though, as the outcome could shape the EU’s trade relationship with the U.K. economy in terms of trade after all.
Although the EU already gave the green light for the Brexit transition deal, PM May has yet to gain the support of MPs, and this is proving to be a tall order. Keep in mind that rejection could mean another round of negotiations, possibly a leadership challenge, or even a “no deal” Brexit outcome – all of which would have repercussions on the euro zone economy as well.
ECB head Draghi’s speech (Dec. 5, 8:30 am GMT)
ECB Overlord Draghi is set to grab the mic and share some thoughts on the economy and monetary policy during his opening remarks at an ECB conference on bank supervision.
His comments in the previous week (see recap below) weren’t exactly on the upbeat end as he admitted that data has weakened since September, casting doubts on the central bank’s pace of tightening even after asset purchases are due to end.
CDU Conference (Dec. 7)
Before the trading week comes to a close, Germany’s Christian Democratic Union (CDU) will convene to discuss who will be replacing Chancellor Angela Merkel as the head of its political party.
Recall that Merkel announced last month that she would step down as the party leader this December after a not-so-stellar turnout in the latest state election. There are three main contenders for the top spot namely Annegret Kramp-Karrenbauer dubbed “mini-Merkel”, young health minister Jens Spahn, and charismatic wildcard Friedrich Merz.
The actual vote will come on Saturday and the results aren’t really expected to have a huge market impact yet, although these could set the tone for German politics particularly in the post-Brexit world for years to come.
Last Week’s Price Review
The euro is currently the third top-performing currency of the week (as of 2 pm GMT). But like last week, the euro’s price action wasn’t really very uniform this week.
Also, there are also still clear instances of diverging price action, which means that the euro is still somewhat vulnerable to opposing currency price action.
However, if we strip EUR/AUD and EUR/NZD from the overlay then we get this.
As you can see, EUR pairs drifted roughly but broadly lower then bounced higher thanks to Powell’s comments, so one way to simplistically characterize the euro’s price action is that the euro is a net winner this week because it was the tertiary beneficiary of the Greenback’s weakness in the wake of Powell’s speech.
Anyway, the euro had a mixed and messy start but buying pressure was apparent on most pairs, thanks to news over the weekend that Italy is willing to compromise with the E.U. by lowering its deficit target.
There were also a bunch of positive Italy-related updated and rumors as the day progressed, which reinforced the idea that Italy will play nice with the E.U., but as noted in Monday’s London session recap, sellers began to attack the euro after the Ifo institute revealed that business sentiment in Germany deteriorated even further.
More EUR bears then came out of the woods during Monday’s U.S. session when ECB Overlord Draghi said that “The data that have become available since my last visit in September have been somewhat weaker than expected.”
It also probably didn’t help that Italian PM Conte and his top deputies announced that:
“The objectives that have already been fixed are confirmed.”
“As far as the on-going discussions with European institutions are concerned, we agreed to wait for the technical analysis of the proposed reforms which have the most important social impact to quantify precisely the cost.”
In other words, the Italian government didn’t make any changes to its budget proposal after all.
And to make matters worse, there was a Reuters reports on Tuesday which claimed that the E.U. was set to getting ready to get tough on Italy by recommending a “debt-based EDP (excessive deficit procedure)” on Thursday.
However, that report came out at around the same time that Fed Vice Chair Richard H. Clarida was speaking, which caused the Greenback to strengthen, so it’s also probable that the euro was hit by Greenback strength.
In any case, the euro drifted mostly lower after that before finally jumping higher (except on EUR/NZD and EUR/AUD) when Fed Chair Powell gave a speech, which caused the Greenback to tank hard since Powell’s main message is that the Fed is shifting to a more neutral and data-dependent stance and that Powell now thinks that rates are “just below” neutral.
The euro’s price action then became a bit mixed after the jump. EUR bulls would later try to bid the euro higher again during Thursday’s London session. And the apparent catalysts was the ECB’s financial stability report, likely because the ECB noted that “a growing economy and improved banking sector resilience have continued to support the financial stability environment in the euro area.”
Moreover, “a series of volatility events have not spread to the broader global financial system.” And concerns surrounding Italy, in particular, haven’t “meaningfully spilled over to other euro area countries.”
Interestingly enough, the E.U. announced during Thursday’s U.S. session that E.U. government representatives have recommended opening an excessive deficit procedure against Italy.
However, Reuters already spilled the beans a couple of days before, so the move was widely expected and didn’t elicit a strong bearish reaction from the euro.
The euro then began to attract buyers again when the FOMC minutes were released. However, that was the last boost for the bulls since the euro’s rise eventually stalled and the euro’s price action became more mixed come Friday.
The euro even began to encounter some selling pressure during Friday’s morning London session, likely because the Greenback was in recovery mode and there were some disappointing Euro Zone economic reports at the time, including the latest inflation report.
The Swiss Franc
The Swissy is currently mixed but a net loser (as of 2 pm GMT), which is a rather poor performance considering that the Swissy was last week’s champ.
EUR and CHF pairs were dancing somewhat in tandem (as usual), but there were two instances of clear decoupling.
The first instance happened on Tuesday since the Swissy stayed resilient even as the euro tumbled because of the double whammy from Fed Vice Chair Clarida’s comment and a Reuters reports which claimed that the E.U. will recommend a “debt-based EDP (excessive deficit procedure)” by Thursday.
The other instance of decoupling (and the reason why the euro outperformed the Swissy) is when the euro caught a bid because of the ECB’s financial stability report on Thursday but the the Swissy didn’t get as big a boost and even weakened on some pairs, likely because risk appetite was the dominant sentiment on that day.