A combination of downbeat ECB remarks and downside PMI surprises weighed heavily on the euro last week. Can it recover this time?
German Ifo business climate (Dec. 18, 9:00 am GMT)
Leading indicators might be gathering a bit more attention for the euro zone these days, particularly after the dismal figures released last week.
Euro zone’s top dog Germany will be printing the business climate index compiled by Ifo from surveyed manufacturers, builders, wholesalers, services, and retailers for the current month and a dip from 102.0 to 101.8 is expected.
This would signal weaker business conditions down the line and would also mark the third consecutive monthly decline for the index.
Last Week’s Price Review
The euro’s two-week winning streak will very likely end this week since the euro is currently lagging behind in third-to-last place (as of 2 pm GMT).
And the euro had a rough time this week due to some negative Brexit-related developments, the ECB’s not-so-upbeat outlook for the Euro Zone economy, and the latest batch of PMI reports for Germany, France, and the Euro Zone as a whole, which all surprised to the downside.
The euro had a mixed start but began encountering broad-based selling pressure during Monday’s London session, apparently because of the ECJ’s decision that the U.K. can unilaterally reverse Brexit.
The euro actually tried to jump higher because of the ECJ decision at first, but the decision was widely expected since the ECJ’s Advocate General already recommended that course of action last week. Profit-taking was therefore to be expected.
However, Theresa May responded to the ECJ decision by calling for an emergency meeting, which fueled speculation that British PM Theresa May would either delay Tuesday’s “Meaningful Vote” or announce her resignation.
And as it later turned out, Theresa May announced during Monday’s U.S. session that the “Meaningful Vote” was delayed, which kicked the euro even lower.
Follow-through selling after Theresa May’s announcement was only limited, though, possibly because of short-covering.
However, EUR bears would launch another attack during Tuesday’s U.S. session when Italian Economy Minister Giovanni Tria said defiantly that Italy’s “budget will not be turned upside down” just a day before budget talks with the E.U. were set to resume.
More bears would also be enticed to come out of the woods when rumors began to circulate that a leadership challenge against Theresa May was brewing.
Confidence vote watch. I know it’s a dangerous game to play and Sir Graham is keeper of the list. But my ERG sources pretty confident now that 48 trigger been breached. Of course Sir Graham won’t announce while PM out of country – and we’ve been here before. But mood hardening
— Beth Rigby (@BethRigby) December 11, 2018
The euro eventually found support and began trading sideways before finally finding buyers again after the leadership challenge against Theresa May was officially announced during Wednesday’s London session, likely because of short-covering, although actual buyers may have propped up the euro since MPs began showing support for Theresa May, so much so that a majority of MPs had already expressed their public support for Theresa May by the end of the session.
Our @BBCNews tally says 158 Tory MPs have now said they will be backing the PM tonight – remember it’s secret ballot but that’s enough for her to win
— Laura Kuenssberg (@bbclaurak) December 12, 2018
The euro also got a small bullish boost when Italian PM Giuseppe Conte said that Italy decided to lower its deficit target to 2.04% of GDP after meeting with European Commission President Jean-Claude Juncker.
The euro wasn’t able to take advantage of that goods news, however, since the no confidence vote against Theresa May got underway shortly after Conte’s announcement.
And fortunately for Theresa May, she survived the leadership challenge. That didn’t elicit a positive response from the euro, however, probably because May’s win was already priced in and because traders were hunkering down for the ECB statement.
Speaking of the ECB statement, that caused the euro to toss and turn but was practically a dud since the ECB announced that it will end its QE program while also announcing that the key policy rates will hold steady “through the summer of 2019.” Basically, the ECB’s actions were all within expectations.
ECB Overlord Draghi did sound a bit dovish during the ECB presser that followed shortly, however, causing the euro to tumble broadly lower.
You see, the ECB downgraded its 2018 and 2019 growth projections and 2019 inflation forecast while sounding downbeat on the outlook for the Euro Zone economy.
To quote the Draghster (emphasis mine):
“[T]he balance of risk is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”
Follow-through selling was only limited, however, probably because the inflation and growth forecast downgrades were widely expected.
The ECB also gave some details on its reinvestment plans, but that was a big nothingburger since the ECB basically said that it won’t be unwinding its balance sheet anytime soon, which is also a widely expected move.
The euro then traded sideways after that, but gut whupped hard during Friday’s London session, thanks to a bunch of disappointing PMI reports. And as an interesting side note, the euro was actually a net winner before those PMI reports were released.
By the way, budget talks between the E.U. and Italy ain’t over yet since E.U. Commissioner Pierre Moscovici said on Thursday that Italy’s decision to lower its deficit target from 2.4% to 2.04% is “a step in the right direction, but we aren’t there yet.”
The Swiss Franc
The Swissy may soon be marking its second week of net wins since it’s currently mixed but a net winner (as of 2 pm GMT).
As you can see in the sample pairs below, EUR and CHF pairs had roughly similar price action. The disappointing Euro Zone PMI reports also didn’t hurt the Swissy as much as they did the euro, allowing the Swissy to outperform the euro.
There was also another instance when EUR and CHF pairs decoupled. And that happened on Monday since Theresa May’s announcement that the “Meaningful Vote” was delayed caused the euro to weaken but the Swissy began attracting buyers on most pairs, likely because of safe-haven flows.
As a side note, the SNB announced its latest monetary policy statement during Thursday’s London session, but that event was a dud (as usual) since the SNB kept its monetary policy unchanged while repeating its mantra that the Swissy is “still highly valued” and that the SNB will continue to “remain active in the foreign exchange market as necessary” (*cough* currency manipulator *cough*) since a weaker Swissy and the SNB’s negative rates “remain essential” in order to “keep the attractiveness of Swiss franc investments low and reduce upward pressure on the currency.”