The euro deterioration against the U.S. dollar noticed in the previous edition of our "EUR/USD week ahead" review, continued during the last week. The economic data on both sides of the ocean came out mixed. This was not enough to support a risk-on environment and the U.S. dollar gained about a half percent against the euro. Most of the business assessment indexes from Europe on Wednesday were below both the consensus estimates and their previous values. On Wednesday the FOMC meeting was held on which the members of the committee decided that:
"...a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."
The committee members also expressed concerns that the strains in the global financial markets pose a danger to the economic recovery and reiterated the idea that the FED could,
"...undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability."
This course of actions continues to weight on the U.S. dollar value in long term.
The Friday data on U.S. GDP annualized showed an increase to 2% in the Q3 which supported the risk-on sentiment of the market.
What is needed now for the euro appreciation to go on is a continuation of the positive news flow from Europe. At the moment more positive news could be found in the political area than in the economic data.
On Sunday in an interview in the German magazine Der Spiegel, Mr. Draghi, the ECB President, backed up the proposal of the German Finance Minister to extend the powers of the European monetary affairs commissioner over the member states budget, according to Reuters. Given this happens, it will solve one of the most significant underlying problems of the European Union. It could take a long time before it is implemented but it is a step towards a greater unification of the Union.
Again on Sunday the ECB's policymaker Nowotny said Spain is in no imminent need of help from the ECB's bond buying program. He, however, expressed some concerns about the practical functioning of the European Stability Mechanism, the new permanent bailout fund of Europe, according to a Reuters article. This offers a glimpse of some of the problems that may lay ahead even if Spain requests a help.
The Week Ahead
The euro started the current week with a decrease to $1.2885, close to the lowest value from the previous week ($1.2881). Still the long term uptrend seems in line but an increase of negative economic data could weight on the risk taking sentiment of the market participants. Thus they will prefer more safe haven currencies like the USD or CHF.
Another factor that could provide a demand for USD is an increase of the expected inflation differential between the U.S. and Europe. A bigger increase in the inflationary expectations in the U.S. than in Europe would support the USD as it could make the FED to reassess its accommodative monetary policy.
The week ahead presents some economic indicators concerning inflation which should be watched with caution.
In order to take advantage of their expectations for the EUR/USD exchange rate, the investors could use a position in the CurrencyShares Euro Trust (FXE). The ETF has an expense ratio of 0.40% and tracks the price of the euro measured in U.S. dollars. Those investors who expect the euro to continue its appreciation could use a long position in the ETF. Those who favor a higher value for the USD against the euro could open a short position in the ETF.
Monday, Oct. 29
USA Core Personal Consumption Expenditures - Prices Index (Sept.)
USA Personal Income (Sept.)
USA Personal Spending (Sept.)
EU Germany Consumer Price Index (Oct.)
Monday presents two indexes which could provide hints on the expected inflation on both sides of the ocean. The core personal consumption expenditures in the U.S. is expected to stay without change on a month-over-month basis. Any increase here would support the USD. The Germany consumer price index which is indicative of the expected inflation in the Euro zone is expected to show no change from the previous value. An increase here would support the euro in long term but in short term could weight on its value because a higher inflation could hamper growth and increase risk.
The expected increase in the personal income in the U.S. would support the notion that the country is headed for growth. This will be euro supportive because would increase the risk taking sentiment of the markets. The same is true for the personal spending. Any negative surprises on both indicators would weight on the growth prospects and support the USD in short term.
Update as of 14:00 GMT: Data on the U.S. core personal consumption expenditures and personal income were in line with the expectations. A higher reading for personal spending was noted (0.8%). The Germany Consumer price index was also in line with the expectations but the harmonized index of consumer prices in Germany (the official reading of inflation used in Europe) showed a bit higher reading (2.1%) than the consensus value (2.0%). The EUR/USD exchange rate was virtually unchanged and continues to trade in the $1.2885- $1.2910 range.
Tuesday, Oct. 30
EU ECB President Draghi speech
EU Germany Unemployment Change (Oct.)
EU Consumer Confidence (Oct.)
EU Business Climate (Oct.)
USA S&P/Case-Shiller Home Price Index (Aug.)
USA Consumer Confidence (Oct.)
The speech of the ECB President on Tuesday could provide further hint on the arsenal the ECB would like to use in order to contain the sovereign crisis. An expansion of the set or comments about a particular usage of already approved measures would support the euro.
A negative surprise on the Germany unemployment rate would weight on the euro and support the USD.
An improvement in the consumer confidence in the Euro area would support the euro. Another positive euro supportive factor could come from an unexpected increase of the business climate indicator which slides continuously since April 2012.
In the U.S. both the home price index and consumer confidence are expected to mark better than previous values. In general, given no significant deterioration happens in Europe, those better values would increase the risk taking sentiment and thus support the euro. A significantly higher value of the home price index however could pose an inflation threat before the U.S. economy which may prompt FED for a reassessment of its monetary easing policy.
Wednesday, Oct. 31
EU European Finance Ministers Hold a Call on Greece
EU Germany Retail Sales y-o-y (Sept.)
EU CPI (Oct.)
EU Unemployment Rate (Sept.)
USA Mortgage Applications (Oct. 26)
USA Chicago Purchasing Managers' Index (Oct.)
On Wednesday the European Finance Ministers are expected to hold a call on Greece. The country is due to receive the next tranche (almost $40 billion) of the emergency loans from EFSF. Recently there were remarks of European officials, including the ECB policymaker Nowotny, that it is sensible to give more time to Greece to implement the needed reforms. Given this the next tranche is expected to happen according to plan. Thus it would not negatively affect the euro.
The consensus on the Germany retail sales is for a decrease on a year-over-year basis but a no change on month-over-month basis. Given the month-over-month expectations prove to be true or there is an increase in the retail sales this would support the euro.
The consensus for the European consumer price index is that it will show a slight decrease. A surprising increase here would support the euro as it would change the inflation differential between Europe and the U.S.
A negative surprise on the EU unemployment rate would weight on the euro by decreasing the risk taking sentiment.
A positive surprise on the mortgage applications in the U.S. would add to the notion that the country is recovering. This would be euro supportive given no major disruption has happened in the Euro zone.
The consensus on the Chicago PMI is that it will go back above the 50 line which is considered the division line between an optimistic and a pessimistic view. A negative surprise here would weight on the growth expectations, increase risk and thus could support the USD in short term.
Thursday, Nov. 1
USA ADP Employment Change (Oct.)
USA Unit Labor Costs (Q3)
USA Initial Jobless Claims
USA Construction Spending m-o-m (Sept.)
USA ISM Manufacturing PMI (Oct.)
USA ISM Prices Paid (Oct.)
Thursday presents mostly U.S. economic data. The consensus values on the ADP employment change and the initial jobless claims predict a deterioration in the U.S. employment situation. This would weight on the risk-on environment and would support the USD as a safe haven currency. The labor costs are indicative of possible inflation. The lower consensus value would mean a decreased inflationary expectations in the U.S. and as such would support the euro.
Negative surprises on construction spending and ISM manufacturing PMI would reduce positive expectations for the U.S. economy which in general would weight on the USD. However, a combination with a lower expected growth in other parts of the world would increase demand for safe haven currencies, including the USD.
A reading of ISM prices paid higher than the estimate and the previous value would support the USD as it would mean higher future inflation.
Friday, Nov. 2
EU Germany Markit Manufacturing PMI (Oct.)
EU Markit Manufacturing PMI (Oct.)
USA Nonfarm Payrolls (Oct.)
USA Unemployment Rate (Oct.)
USA Factory Orders (Sept.)
The consensus estimates on the European manufacturing PMI and the Germany one are for a decrease in their readings. This is in line with the deterioration recently seen in the economic situation in Europe. If those values are confirmed this would weight on the euro. Positive surprises would add fuel to the risk taking sentiment and support the single currency against the USD.
Negative surprises concerning the U.S. data would weight on the recovery expectations, reduce risk taking sentiment and thus promote the demand for USD.
Disclaimer: This article is not and should not be considered to be an investment advice, it is not and should not be used as an offer or solicitation to buy, sell or in any other way trade securities, currencies or other financial instruments. It is written and should be viewed as an expression of an analytical point of view only.
Additional disclosure: I am long EUR