Despite last Friday's spike to the area post-FOMC fiasco around 1.3565/70, the single currency netted the first weekly pullback after two consecutive advances, closing around 1.3520. The past sessions were characterized by the generalized mixed tone from the global markets, with the euro paying more attention to the dollar-side of the pair rather than its own. Furthermore, we can say that the advanced manufacturing/services PMI prints, the German IFO series and Gfk Survey all exhibited a neutral-to-positive tone. However, the pair's attention was across the Atlantic, with U.S. releases, the fiscal gridlock and the debt ceiling debate in the spotlight, amidst a colorful slew of Fedspeak. All in all, euro-bulls found the 1.3565/70 band quite a tough barrier to overcome.
Politicians are back!
The U.S. political arena will be the outstanding theme in the week ahead, with the main focus on October 1, deadline for the U.S. Congress to come to an agreement and help avoid a government shutdown. The other crucial issue, the debt ceiling discussions, would remain dormant until mid October, when according to U.S. Treasury Secretary Jack Lew, the Treasury could run out of funding resources, pushing the country to the brink of default. It is worth recalling the similar situation back to August 2011, when a solution finally turned up. Maybe that's why market reaction has been so far muted, although some signs of concern have already emerged in the stock markets. Clearly, the greenback was not benefited from the current uncertainties, while the FX community seems to be struggling between the safe-haven status of the USD and the U.S. being the problem itself, resulting in unnoticeable demand for the world's reserve so far. I am looking for a solution at the 11th-hour, as per usual, with markets then shifting the attention to Friday's Payrolls amidst a context of risk-on trade.
Now, let's cross the pond back again and take a quick glance at Italy, where former PM Silvio Berlusconi has fulfilled his promises of withdrawing the PdL's members of the Parliament, pushing the country once again to political chaos. Undoubtedly, this fact would weigh on the single currency soon after the opening bell in the FX markets, while investors will put under the microscope the next steps from PM Enrico Letta and President Giorgio Napolitano, amidst another quest for bringing (in the interim, at least) some stability to the country, and somehow allaying the specter of a downgrade.
In the meantime, in Germany, negotiations between Chancellor Merkel's CDU and the SPD give the impression they'll drag on into December and beyond. In my opinion, this could easily become a snowball, with certainly negative implications for the shared currency, as markets seem to be ignoring the problem so far, let alone price in any consequence.
ECB is looming
The ECB meeting is a key event for the single currency on Wednesday. There has been increasing market chatter regarding the likeliness of another LTRO, although this scenario seems only likely should President Draghi decide to intensify the current forward guidance or the liquidity conditions threaten to put extra upside pressure on short-term rates. The recent dovish tone in speeches and comments by Mario Draghi trying to 'talk down' the euro passed almost unnoticed by the pair's price action, however they allow us to think the same outcome in the upcoming gathering, along with another discussion regarding a refi rate cut, or maybe another measure from the central bank's toolbox.
And finally, NFP
So, the first half of the week would be dominated by the U.S. fiscal debate headlines and the ECB's monthly meeting, all preceding the biggest event in the FX markets: the Nonfarm Payrolls. Prior estimates expect the U.S. economy to have created 179K jobs in the month of September and the unemployment rate to have stayed put at 7.3%, thus giving traders more reason to believe that a tapering of QE before year end is still feasible, thus adding buying interest to the greenback.
In the technical camp, the pair closed the week just slightly below where it opened, although keeping the area of 1.3520/30. The likeliness of a visit to year-to-date highs beyond 1.3700 remains alive as long as the pair quickly leaves behind the developments in Italy and the U.S. fiscal gridlock unwinds favorably. Then will come U.S. Payrolls, where a decent read has the potential to drag the pair lower via a stronger greenback. The first support area would be the 23.6% Fibonacci retracement of the Feb-Apr slide at 1.3340/45, reinforced in the vicinity of the 21-day moving average around 1.3350 followed by the 1.3315/00 area (55-day moving average and psychological level). If further selling pressure sharpens, then the 1.3230/1.3170 region (38.2% retracement, 100- and 200-day moving average) should provide decent support.