EUR Rise Greased by Pound Performance

As the Euro investor digests a plethora of earnings reports, the single currency has been dragged higher this morning, mostly by its compatriot, Sterling, and into a territory where sellers tend to domicile. Overhanging recent events in the US and the Euro-zone are doing noting to instill further confidence to really push these markets much higher from here.

The UK economy has gone from a recession to posting the best quarterly performance in five years. This morning’s Q3 GDP print grew by +1%, beating market expectations of +0.6%. Expect the BoE to be looking past the GDP volatility within, as the report was certainly flattered by once off events, bringing into question the sustainability of the UK recovery. The impact of the Jubilee celebrations and Olympics is likely to have added +0.6% to the GDP. Deducting this from the headline and we get a reasonable +0.4% growth level. However, analysts note that the y/y reading really shows a flat-lining economy. Policy makers will be looking beyond this data, making it more difficult for traders to decipher what the November BoE meeting outcome will be. Many expect policy makers to expand QE by another +GBP50b. The pound has rallied to a one week high on the back of this data, but is it enough?

Should this be music to investor’s ears? “ My funding needs for this year are almost covered, at 95%, and my intentions is to start funding the Treasury for next year” said the head of the Spanish Treasury. Yes it should, but we expected it, especially with the ECB pledging to be their very own stop-loss. Market conditions have improved drastically since the summer. Foreign investors are now the dominant buyer of Spanish debt. Policy makers should be breathing a sigh of relief, however, big question marks surround Spanish bad banks. Spain has relied on the ECB’s bond buying pledge, but before they can step in with a helping hand Spain needs to officially ask for aid. The market believes that Prime Minister Rajoy will do this next month. It would be a dangerous game if the Spanish think the perception of an ECB backstop is enough.

Other data this morning revealed that Euro-zone banks have cut their lending to businesses and households in September (down –EUR21b m/m) as the region slides into recession. It’s no big surprise. Banking actions are forcing companies to look for alternative forms of funding. It goes to show that even with record low interest rates and massive liquidity not all sectors will benefit. The weakness in private sector lending should worry Euro policy makers especially. A fragmented banking sector will end up preventing Euro policy decisions from reaching the real economy. Policy makers are relying heavily on the consumer to spend the way out of this crisis.

Today, Stateside, there is a heavy flow of data that is likely to support the positive momentum in US economic activity. Market consensus is looking for a durable goods headline print of +6.5% m/m and +1% on the core. Do not be surprised to see a small improvement in weekly claims; market consensus is looking for a +375k print. Even pending home sales is expected to bounce back from the -2.6% print in August to somewhere around +2.5%.

oct 25

The EUR is testing close to its 10-DMA (1.3020) on the Euro session handover. It seems the market still expects some price rejections. Despite hunting for stops, traders are looking at the “rejection from here” strategy. Intraday studies are closing in on overbought territory, as daily charts suggest a biased lower in prices. For now, expect the market to remain a better seller of the single currency on upticks.

Forex heatmap

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Tentative EUR Unhinged by Germany

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