During the last week the euro continued to trade in a range, but in a narrower one. On Wednesday it reached its lowest point for the week around $1.295, caused mainly by bad data from Europe and worse-than-expected durable goods orders in the U.S. The single currency recovered on the next day to its highest value for the week (in the $1.309 area) on the back of an improvement shown in the U.S. unemployment. The euro finished the week with a smaller change (-0.18%) than the previous week's one (-0.38%). This continuation and narrowing of the range could mean a breakout on either direction could be approaching. If this is happens to be true, an elevated risk of unexpectedly large movements in both directions could be present.
A recent Bloomberg article suggest the central banks around the world would have to soon deal with a deflation problem. The main anti-deflation tool they possess is the easing monetary policy. This problem seems to be developing in both Europe and the U.S. A further increase of the monetary easing would lead to a further devaluation of the respective currencies, with the one whose country provides more easing to become cheaper in long term. The current week could reveal much of the central banks future moves and those are among the main event risks the EUR/USD rate faces at the moment.
As of time of writing the euro trades around the $1.3080 level.
The Week Ahead
Although Wednesday is a non-working day in Europe, the current week presents an increased amount of economic data compared to the previous one. The most important risk events of the week are the consumer price index for Germany, the U.S. core personal expenditures consumption (Monday), the EU unemployment, the preliminary data on the EU consumer price index, and the U.S. consumer confidence (Tuesday), the FED's monetary statement and press conference (Wednesday), the ECB rate decision and press conference (Thursday), the U.S. nonfarm payrolls and unemployment rate (Friday). Those have the potential to present an increased volatility in the EUR/USD exchange rate.
This week's analysts expectations reverse the optimistic mood from the previous week. Only about 26% of the expectations are for better-than-previous values, compared to 45% for the previous week. Consensuses are more optimistic for the U.S data (35%) than for the European one (17%).
The analysts' mood is close to its lowest value measured in the last six months, although still not at the lowest level. This increases the potential for positive surprises during the week. Those could generally favor the euro.
The current value of our Consensus Optimism Index (COI) is 26, down from about 45 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 (NYSEARCA: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 29
Event | GMT Time | EST Time | Consensus | Previous |
EU Business Climate | 09:00 | 4:00am | -0.89 | -0.86 |
EU Consumer Confidence (Apr.) | 09:00 | 4:00am | -22.3 | -23.5 |
EU Services Sentiment (Apr.) | 09:00 | 4:00am | -7.0 | -6.7 |
EU Germany Consumer Price (Y-o-Y) (Apr.)p. | 12:00 | 7:00am | 1.5% | 1.4% |
EU Germany HICP (Y-o-Y) (Apr.)p. | 12:00 | 7:00am | 1.7% | 1.8% |
USA Core Personal Consumption Expenditure - Price Index (Y-o-Y) (Mar.) | 12:30 | 7:30am | 1.3% | |
USA Personal Income (Mar.) | 12:30 | 7:30am | 0.4% | 1.1% |
USA Personal Spending (Mar.) | 12:30 | 7:30am | 0.1% | 0.7% |
USA Pending Home Sales (M-o-M) (Mar.) | 14:00 | 9:00am | 0.3% | -0.4% |
Monday presents a significant amount of economic data. The consensuses for the GMT 9:00 data are for slightly worse values than the previous ones. Generally, this would be USD positive. The expectations on the Germany inflation data are mixed so any surprises there could neutralize one another.
The expectations on the U.S. data are also more negative than positive. This presents opportunity for positive surprises which in general could favor the euro against the USD.
Update as of GMT 10:00: The economic data on the European business climate (-0.93) and services sentiment (-11.1) came out much worse than expected. The consumer confidence (-22.3) was an exception of the negative surprises trend. This lead to only a slight decrease of the value of the euro to $1.3077. It traded at as high as $1.3099 before the data releases.
Tuesday, April 30
Event | GMT Time | EST Time | Consensus | Previous |
EU Germany Unemployment Change (Apr.) | 7:55 | 2:55am | 3K | 13K |
EU Consumer Price Change (Y-o-Y) (Apr.)p. | 09:00 | 4:00am | 1.5% | 1.7% |
EU Unemployment Rate (Mar.) | 09:00 | 4:00am | 12% | 12% |
USA Consumer Confidence (Apr.) | 14:00 | 9:00am | 59.5 | 59.7 |
Tuesday's trade in EUR/USD pair could be under the influence of the European data. Positive surprises in the unemployment area could lead to euro appreciation. A lower-than-expected value of the EU CPI however, would increase the expectations for a rate cut on behalf of the ECB which could weigh on the single currency.
In the European afternoon any surprise on the U.S. consumer confidence would drive the value of the single currency in the direction of the surprise.
Wednesday, May 1
Event | GMT Time | EST Time | Consensus | Previous |
USA ADP Employment Change (Apr.) | 12:15 | 7:15am | 145K | 158K |
USA ISM Manufacturing PMI (Apr.) | 14:00 | 9:00am | 51.3 | 51.3 |
USA ISM Prices Paid (Apr.) | 14:00 | 9:00am | 53.5 | 54.5 |
USA FED Interest Rate Decision | 18:00 | 1:00pm | 0.25% | 0.25% |
USA FED Monetary Policy Statement, Press Conference | 18:00 | 1:00pm |
Wednesday is a non-working day in Europe so the trading will be dominated by U.S. data. The analysts' expectations are for slightly worse-than-previous values. Any positive surprise here could lead to appreciation of the value of the single currency, while a negative surprise would have the opposite effect.
The most important risk event is the FED's press conference. Depending on the language used in the monetary policy statement and the press conference, it could present increased volatility in the EUR/USD currency pair. It could also determine the near- to long term direction of the exchange rate movement. For instance, a strong language in favor of a continuation of the current monetary easing policy could lead to an euro appreciation.
Thursday, May 2
Event | GMT Time | EST Time | Consensus | Previous |
EU Germany Markit Manufacturing PMI (Apr.) | 07:53 | 2:53am | 47.9 | 49 |
EU Markit Manufacturing PMI (Apr.) | 07:58 | 2:58am | 46.5 | 46.8 |
EU ECB Interest Rate Decision | 11:45 | 6:45am | 0.5% | 0.75% |
EU ECB Press Conference | 12:30 | 7:30am | ||
USA Initial Jobless Claims | 12:30 | 7:30am | 345K | 339K |
USA Trade Balance | 12:30 | 7:30am | $-41.9B | $-43.0B |
The consensuses on both of the Markit indexes are for worse-than-previous values. Consequently, positive surprises could support the euro.
The biggest event risk comes from the ECB rate decision and the bank's press conference. The volatility in the EUR/USD pair could be increased around the time of the both events. A surprising decision not to cut the rate and leave it as it is, could give a strong support to the single currency in a near term.
Friday, May 3
Event | GMT Time | EST Time | Consensus | Previous |
EU Producer Price Index (Y-o-Y) (Mar.) | 09:00 | 4:00am | 0.7% | 1.3% |
USA Nonfarm Payrolls (Apr.) | 12:30 | 7:30am | 88K | |
USA Unemployment Rate | 12:30 | 7:30am | 7.6% | 7.6% |
USA Factory Orders (Mar.) | 14:00 | 9:00am | 54.1 | 54.4 |
Friday's trading would be dominated by the U.S. data. Surprisingly better-than-expected values would increase the risk taking sentiment and thus, support the single currency.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
