Tough week for the euro, but hard to be USD

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  • Euro declines sharply on rate cut speculation
  • Markets eye ECB & BoE policy announcements on Thursday
  • Cable closes in on monthly lows as BoE is firm that stimulus remains
  • Delayed NFP slated for Friday, markets eager for first post shutdown result

It was a tough 5 days for the Euro, which has slid versus the USD every day this week. After carving out fresh multi-year highs the week prior, the common currency came under significant pressure following lackluster inflation data and a record high unemployment result.

As the dust starts to settle, the Euro has given up over 3-big figures versus to the USD and despite starting the week strong against both the Japanese Yen and the Sterling, has ended softer than where it started. The theme of Euro softness is a product of speculation that given weak data the European Central Bank (ECB) may look be looking to cut its benchmark rate, currently 0.5%, as early as next week at its regularly scheduled monetary policy announcement.

This sharp move down in the common currency presents buyers, whom have largely been sidelined recently, with a bit of a reprieve. Looking to next week the data calendar is pretty limited in terms of top tier data, however Thursday’s ECB activity will keep markets on their toes in the days prior to. The Sterling on the other hand has plenty of related data slated for next week, highlights including central bank action on Thursday and Manufacturing Production on Wednesday. No change in monetary policy is expected. Despite the strong GDP result earlier this month, Bank of England Chief Mark Carney has been very clear that he doesn’t feel that the UK recovery has enough momentum to sustain itself without the current stimulative policies and he intends to play it safe.

This has put the Sterling on its back foot and versus the USD and is currently trading near its lowest value since September. Once again this presents buyers with a good opportunity to execute. Looking forward, negative USD sentiment is a key risk to current levels. Should uncertainty regarding the Big Dollar move back into headlines via the fiscal and economic drag of the recent government shutdown the Euro and the Pound are well positioned to benefit as investors unload positions in the Greenback.

October’s Non-Farm Payrolls in the US are due out next Friday, which is actually a week late from its normal first Friday of the month. The publishing date was pushed back due to the recent American government shutdown. According to a Reuters’ survey, expectations are for 125k, a significant drop from both last month’s 148k (which was a disappointment in its own right) and August’s 169k. The labor sector scenario is poignant evidence of the impact of the October’s shutdown, and yet another argument for Bernanke and the Federal Reserve holding back on tapering.  Despite this week’s less dovish than expected Fed statement, it’s hard to be particularly bullish the Greenback in the near term. Markets have got a Taper on their mind and it’s become the benchmark, until we get it (or it looks like we will) it’s fair to say that markets will view the USD as ‘under performing’ expectations..

Further reading: EUR USD forecast

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About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

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