Fundamental Forecast for EUR/USD: Neutral
– The Euro continued its streak of weak point, dropping floor to 5 of the opposite seven main currencies because the calendar turned from October to November.
– Tright here are not any ‘high’ rated German or Eurozone knowledge releases in the approaching week, that means the solely potential home catalyst in the times forward is progress round Italy’s funds (extra attention can be paid to the US midterm elections and Brexit).
– The IG Client Sentiment Indexhas rapidly flipped to bearish as retail merchants purchase the Euro dip.
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The Euro was the third-worst performing main foreign money for the second week in a row, dropping floor towards all however for the Swiss Franc (EUR/CHF +0.52%) and Japanese Yen (EUR/JPY +1.01%). This was to no fault of the Euro; relatively, buoyed danger urge for food lifted increased yielding currencies, and progress on the Brexit entrance sparked a British Pound reversal (EUR/GBP -1.24%).
To this finish, because the world’s reserve foreign money, the US Dollar proved weak relative to the Australian and New Zealand Dollars too. EUR/USD solely dropped by -0.33% final week, however three of the 4 finest performing EUR-crosses had been secure havens (EUR/CHF, EUR/JPY, and EUR/USD).
Unfortunately for merchants, there might not be a lot to extrapolate from the value motion seen final week. The actions seen in increased yielding and risk-correlated property seems to be tied to portfolio rebalancing results after a risky October. With the DXY Index gaining +2.10% and US fairness markets dropping their most since not less than September 2011, it solely appears regular that the brand new buying and selling month would see rebalancing outcome in a bump in danger urge for food. Because of this, it’s tough to recommend that what was seen final week will bear any predictive implications for what’s to come back in the times forward.
The quiet financial calendar over the primary full week of November does little favor for the Euro, insofar because the Euro is missing any concrete drivers on its personal phrases (however for the slight dovish shift on the European Central Bank’s October coverage assembly). The knowledge that has been launched has been disappointing, with the Eurozone Citi Economic Surprise Index falling to -56.7 on the finish of final week, down from -29.3 on October 5.
There are not any ‘high’ rated occasions due out from both Germany or the Eurozone, and the PMI readings due out on Tuesday are ultimate readings of knowledge beforehand launched; odds are the info this week comes and goes with out anybody noticing (an perspective additional bolstered by the truth that US midterm elections are this week, which is the place attention will justifiably be positioned). In truth, until there’s progress in the Italian funds saga, then the Euro will merely be a passenger as different currencies take the wheel.
As a degree of reference, alongside the slide in financial knowledge momentum (seen in different ex-US G10 economies as effectively), power costs have continued to dip over the previous few weeks, miserable inflation expectations. This issues as ECB President Mario Draghi has stated for 2 conferences in a row now that uncertainty across the inflation forecast is receding; extended failure for increased inflation expectations to materialize may present floor for additional hypothesis that the ECB’s subsequent coverage shift can be a dovish one. The 5-year, 5-year inflation swap forwards (President Draghi’s most popular gauge of inflation) are down barely over the previous month, from 1.685% from 1.679%.
Finally, taking a look at positioning, in keeping with the CFTC’s COT for the week ended October 30, speculators elevated their net-short Euro positions to 32.6K contracts, a rise from the 30.3K net-short contracts held in the week prior. Even after a slight construct across the ECB’s October coverage assembly (which this most up-to-date COT report coated), positioning stays traditionally mild and the danger of capitulation stays low.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, electronic mail him at [email protected]