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…and is the BoE getting ready to mix horse meat into the Sterling?

A number of assumptions about stimulus trends and EU risk may be put to the test this week.

So what's likely to move the EURUSD this week?

Actual Economic Data

Data appears to be somewhat reasserting itself. Except for some German sentiment reports, data regarding the rest of the EZ confirmed the current picture of further deterioration and contraction. To add insult to injury, a CEO of a major tire manufacturer seriously dissed French workers as very overpriced and unproductive. The EUR is moving lower, having given up its gains for 2013, despite its remaining significant interest rate advantage over the USD, and the fact that most major stock indexes continue to hold steady.

Could the EURUSD's move lower, diverging from general risk appetite, suggest an overall market reversal, or an EU specific problem? Certainly part of the reason is the political uncertainty in Spain and Italy.

Italian Election Results and Market Reaction

A Bersani-Monti center left coalition is the likely best case scenario and would be bullish for both risk appetite in general and the EURUSD pair in particular. An unexpectedly strong result for Berlusconi would bring the opposite result as it would likely scare markets, thus sending Italian (if not all European) stocks diving and bond yields rising. Berlusconi has taken a populist anti-Brussels (austerity) position that includes abolishing certain tax increases that were a key to healing Italy's budget deficit.

Indeed, a really negative surprise here would likely be the market moving event of the week, reviving EU anxiety and dousing risk asset rallies.

As a side note, Japanese attempts to bring down the JPY (thus far limited to just talk) would likely be reversed quickly and decisively as a rush for safe haven currencies would send markets running into the JPY, and the BoJ could well likely follow prior custom and stand aside until markets calm down.

Bernanke Testimony

If Bernanke confirms the new more hawkish tilt that last week's FOMC meeting minutes suggested, that would send the USD rising and thus the EURUSD falling, as it would mean a slowing of USD devaluation and perhaps a sooner than expected rate increase that would narrow the EUR's interest rate advantage, which could well shrink anyway over the coming year under a variety of possible scenarios.

US Sequester Battle

As mentioned in our recent article on coming week market movers, we don't expect markets to get nervous yet, but it could happen and so we'd be negligent if we didn't at least mention it as a possible EURUSD mover. The question is, how, if at all, will it move the pair? In the unlikely event that the sequester hits for more than a day or so, the fear factor would likely help the USD (and thus hurt the EURUSD) both as a safe haven and beneficiary of the reduced near term spending. The expected resolution and deal on sequester would likely have the opposite effect.

Technical Picture

Unless there's a major risk-on event (like a market friendly Italian election result), overall risk appetite barometers like the S&P 500 are more likely to hurt than help the pair. The EURUSD has been falling even as the index has continued higher or held steady. If the index starts to make any kind of correction, that downward move typically drags the EURUSD down with it. There's no shortage of bad EU data to justify further EURUSD selling.

Side Note: GBP Next Up On The Alter?

As we've been saying for some time now, we believe the UK's economic struggles meant that some kind of additional QE was just a matter of time. Last week's surprisingly dovish BoE minutes showed divided opinion on the matter

Policy makers voted 6-3 to leave purchases as is, with the dissenters, lead by outgoing Governor Mervyn King, calling for an increase of £25B. The last time the bank was this split (June 2012) it approved a £50B increase in Gilt bond-buying within a matter of weeks.

Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.
Source: Weekly EUR/USD Outlook: 5 Things To Watch This Week