Will the EUR wait for the Summit?

Nothing is going any where fast, at least not until the Euro Summit shows and plays its hand we think. The one note of consistence it seems in the last 24-hours is how many analysts have revised their 12-month prediction for the EUR. The results are rather similar with analysts now pegging the currency lower from previous guesses of 1.35 to an average of 1.20-25. Reading the choices has distracted one watching the price action “paint dry”!

European optimism is tentative, however, global bourses have found some traction and advanced to a five-week high amid market speculation that Euro-area leaders will agree on enhanced bailout measures for indebted nations and stricter rules for budget control at the summit. Before anything will be disclosed the market has to contend with the ECB rate decision tomorrow.

It seems that many are now leaning towards an earlier rate cut by the Central Bank. Some analysts expect Draghi to cut key interest rates tomorrow instead of January. The market is pricing in a-25bp ease to +1% and is now anticipating further cuts in Q1, taking the rate as low as+0.5%. A cut alone will not be enough. Policy makers will be expected to be thinking outside the “box”. The ECB is also seen as likely to increase “nonstandard measures” to alleviate bank funding issues. That may include longer liquidity tenders or a temporary easing of collateral requirements.

Data and auctions this morning have been mixed. UK IP came in much weaker than expected in October, down by -0.7%, m/m, on both headline and manufacturing measures, solidifying a poor start to Q4. It looks set to subtract from GDP during the quarter. The fall in manufacturing was completely consistent with the fall in the manufacturing PMI survey over recent months. This relationship certainly points to worse news to come. Below par growth will require more job losses and wage restraint. Consumers can only hope that the Euro-zone does not deteriorate markedly so from here. The German 5-year bobl auction was well received. It’s natural that investors trust the quality of German paper, if they did not, the Euro hole gets larger. Germany’s EUR5b +1.25% 2016‘s offer received bids of +EUR8.7b leading to a very strongly received auction.

The EUR’s failure to make any headway in the low 1.34’s, temporarily strangled by a 1.34 intraday option expiry opens up the possibility of the currency wanting to revisit this weeks earlier lows. The market is trying very hard not to be given or accumulate new positions ahead of the ECB and summit guidance.

Forex heatmap

Other Links:
EUR Headline Watching
AUD and CAD take different routes

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell