FX Outlook: We’re Watching EURO and Central Bank Speak

FX traders should be watching the euro and central bank speak this week. One of the most important pieces of data on calendar was Monday’s Eurozone PMI reports and while the currency recovered quickly from initial losses, the economy won’t be turning as abruptly. Manufacturing activity in the Eurozone contracted at its fastest pace in nearly 7 years with the index falling to 47 from 45.6. The slowdown was led by Germany, where the PMI manufacturing index fell to 41.4, the lowest level in more than a decade. Manufacturing in France moderated as well while services slowed across the board. There is no doubt that Germany is experiencing a recession and when the third quarter GDP numbers are released, it will confirm that the economy contracted for the second quarter in a row. Today’s reports tell us that there’s also a very good chance the Eurozone will follow. According to ECB President Mario Draghi today the temporary slowdown is deeper more prolonged than expected. He sees the need for highly accommodative ECB stance and said the ECB is ready to use all instruments – implying that more easing could be necessary.

Yet the recovery in the EUR/USD post PMIs is a reflection of the market’s hope that the Germans who have hinted of fiscal stimulus will follow through in the coming few weeks. However as noted by our colleague Boris Schlossberg, “German officials remain reluctant to increase the budget, but the longer they wait the worse the situation may become. It’s clear that monetary policy has run out of gas and fiscal tools are needed to jump-start the economy.” Tomorrow’s German IFO report should be softer as data continue to pressure policymakers into action. Until fiscal policy actions are announced, the path of least resistance for EUR/USD is lower with the pair aiming for a break of 1.09.

While there are only a handful of secondary US economic reports scheduled for release this week, there’s a lot of central bank speak. From the US we have Fed Presidents Bullard, Williams, Daly, George, Evans, Kashkari, Barkin and Kaplan speaking at various events. Not all of them will be touching on monetary policy but investors will be listening in closely to see how many FOMC members support further easing this year. We know how Bullard feels because he voted for 50bp in September and George won’t support more easing because she voted against the rate cut this month. Evans, Kashkari and Williams are doves but Daly, Barkin and Kaplan side more with Fed leadership. Bank of England Governor Carney, Bank of Japan Governor Kuroda and Reserve Bank of Governor Lowe will speak as well and all 3 of their currencies are vulnerable to weakness as these central bankers recently talked about the need for easing. The Reserve Bank of New Zealand also has a monetary policy announcement but no changes are expected after the surprisingly large 50bp rate cut in August.

The US dollar is up against all of the major currencies today except for the Japanese Yen and Swiss Franc. Ongoing pressure on US rates and trade uncertainty makes it very difficult for the greenback to rally. The US dollar should be trading higher after last week’s Fed meeting because the majority of US policymakers do not see another rate cut this year. Fed Chairman Jerome Powell was also tight lipped on future policy changes. However USD/JPY fell hard after China cut its US farm visits short. Trade winds are shifting week to week and they moved back in a southwardly direction after President Trump said he doesn’t need a trade deal before the 2020 election. Vice President Pence also said the era of economic surrender is over – none of this language makes us feel good about US-China relations.