During the last week, the euro traded in a range. A sharp increase happened on Tuesday, followed by a similar decline on Wednesday. The single currency finished the week with a little change (-0.38%). The inflation data on both sides of the ocean showed declines on annual basis, with the decline in the U.S. being bigger than the one in Europe. In general this would mean the FED has more room to continue with its accommodating policy than the ECB.
The G-20 meeting, which took place near the end of the last week, signaled acceptance on behalf of those major nations of the monetary easing policy of Japan, as a Bloomberg article point out. The G-20 group "warned of a weak global recovery" and welcomed the measures taken by Japan to revive its domestic growth. Mr. Draghi, President of the ECB, said that:
"Many movements in the exchange rate today are the effect of domestic policies that are geared to domestic objectives. To this extent they are spillovers into other countries' economies, but they originate from domestic policies."
This might suggest that the ECB would focus more on dealing with the domestic problems of Europe than being concerned whether the weak euro is doing any harm to other countries.
As of the time of this writing, the euro trades around the $1.23040/60 level.
The Week Ahead
The most important risk events of the week are the preliminary data on the EU consumer confidence (Monday), the U.S. durable goods orders (Wednesday), and the preliminary U.S. GDP (Q1) (Friday). Those have the potential to present increased volatility in the EUR/USD exchange rate.
This week's analysts' expectations continue the optimistic mood from the previous week, although at a significantly slower pace. About 53% of the expectations are for better-than-previous values, compared to 50% for the previous week. Consensuses are more optimistic for the U.S data (78%) than for the European one (30%).
The analysts' mood is almost in the middle of the range of expectations so no significant surprises to either side are expected. The exchange rate should be determined by the market demand and supply.
The current value of our Consensus Optimism Index (COI) is 53, up from about 50 for the previous week.
The index shows the proportion the positive consensus estimates take in all the estimates we have available for the respective week. A value above 50% represents an optimistic mood in the expectations rather than pessimistic. The weekly change in index's value could be used as a tool to assess the analysts' mood. It should not be neglected however that the EUR/USD rate actually moves rather on the real data and on how that data differs from the expected one.
Investors could take advantage of their own expectations about the EUR/USD exchange rate movement in order to hedge the positions they have in other assets. For instance, American investors with investments in euro denominated assets who expect that the U.S. dollar would appreciate against the single currency, could try to decrease the currency risk by selling euros or by opening a short position in an ETF which tracks the price of the euro. CurrencyShares Euro Trust (FXE) is among the most widespread options here. It tracks only the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%.
For those who prefer more diversified funds, among the options are the PowerShares DB USD Bullish ETF (UUP) and the PowerShares DB USD Bearish ETF (UDN). Both funds are U.S. dollar denominated and track the value of the USD against six other major currencies - euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The funds' expense ratio is 0.50%.
Monday, April 22
USA Chicago FED National Activity Index (Mar.)
EU Consumer Confidence (Apr.)p.
USA Existing Home Sales (M-o-M) (Mar.)
The most important economic data on Monday seems to be the consumer confidence in Europe. The expectations are for a decline in the data. A positive surprise here could lead to an euro appreciation.
A negative surprise regarding the analysts' consensus on the existing home sales would support the USD against the euro.
Tuesday, April 23
EU Germany Markit Manufacturing PMI (Apr.)p.
EU Markit PMI Composite (Apr.)p.
EU Markit Services PMI (Apr.)p.
USA Markit Manufacturing PMI (Apr.)p.
USA Housing Price Index (M-o-M) (Mar.)
USA New Home Sales (M-o-M) (Mar.)
USA Richmond FED Manufacturing Index (Apr.)
The first European economic data on Tuesday that could influence the EUR/USD exchange rate is the Germany Markit manufacturing PMI. A significant deviation from the consensus estimate could drive the price of the euro in the direction of the surprise. The same is valid for the other European Markit indexes released on Tuesday.
The new home sales in the U.S. would show whether the conditions of the house market in the world's leading economy are improving. A negative surprise could increase the risk-off sentiment, and thus benefit the U.S. dollar.
The possibility for a negative surprise might be slightly elevated for the Richmond FED manufacturing index based on the higher expectation the analysts have compared to the previous value. If the index misses the expectations this could benefit the USD.
Wednesday, April 24
EU Germany 30-y Bond Auction
EU IFO - Business Climate (Apr.)
EU IFO - Expectations (Apr.)
USA Durable Goods Orders (Mar.)
The IFO data from Europe is expected to show declines compared to the previous values. Any surprises here could drive the EUR/USD exchange rate in the direction of the surprises.
The U.S. durable goods orders would show the health condition of the American economy and would reveal the expectations of the managers. Any higher-than-expected value could increase the risk-on sentiment and lead to appreciation of the euro. A negative surprise would have the opposite effect.
Thursday, April 25
EU Germany Import Price Index (M-o-M) (Mar.)
USA Initial Jobless Claims
Thursday is relatively calm regarding the economic data. The import price index of Germany would show whether any elevated inflationary expectations could exist in the Europe's biggest economy. If those happen to exist, this could support the single currency.
Friday, April 26
EU M3 Money Supply (3m) (Mar.)
USA GDP (Q1)p.
USA GDP Price Index (Q1.)p.
USA Reuters/Michigan Consumer Sentiment Index (Apr.)
The European M3 money supply would show whether the inflationary expectations in Europe could rise. A value above 3.7% (the January data) could signal of the existence of such expectations. This would be euro supportive because it could increase the pressure on the ECB to not lower its main refinancing rate.
Maybe the most important data for the week is the preliminary data on the U.S. GDP. The consensus estimate is that it will grow to 3% for the Q1 of 2013. Any surprisingly higher- or lower-than-expected value here could lead to appreciation or a depreciation of the euro, respectively. The reason behind such a behavior could be a change in the risk sentiment of the market participants.