Euro Forecast Overview:
- No news may be good news for the Euro over the coming days, given how generally disappointing economic data releases have been otherwise.
- Overnight index swaps are currently pricing in an 87% chance of no change in rates at the October ECB meeting. Overall, there is a 34% chance of 10-bps of rate cuts by the end of the year.
- Retail trader positioning, per the IG Client Sentiment Index, suggests that there may be more room for EURUSD gains.
See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.
Euro’s Strong Start to October and Q4’19
The Euro has had a strong start to the new month and new quarter. Only one EUR-cross is lower through month-to-date, EURJPY, down by -0.20%. Otherwise, gains have been plentiful and have continued to build: EURCAD is the top performer, adding 1.32% thus far, while EURAUD and EURUSD rates are close behind, having gained 0.92% and 0.86%, respectively. The Euro’s gains are coming at a time when traders’ collective attention has turned back to Brexit and the US-China trade war.
Eurozone Economic Data Remains Weak, However
The forex economic calendar is rather empty on the Eurozone side of things this week. In context of recent data performances, that may be a positive development for the Euro: no news may be goods news. Eurozone economic data has continued to produce disappointing results over the past several months, at least when trying to look at economic data from an objective point of view. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is down to -76.7 today from -34.1 one-month ago on September 9 and -13 on July 8.
Eurozone Inflation Expectations Hold Near Yearly Lows
Outgoing ECB President Mario Draghi’s preferred measure of inflation, the Eurozone 5y5y inflation swap forwards, currently are trading at 1.131%, lower than where they were one month earlier at 1.245%, a drop of -11.4-bps. Eurozone inflation expectations are barely above the yearly low set last week on October 3 at 1.115%.
Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (October 2018 to October 2019) (Chart 1)
The relationship between Eurozone 5y5y inflation swap forwards and Brent oil prices has tightened up over the past few weeks. The current 20-day correlation between Eurozone inflation expectations and Brent oil prices is 0.69; one month ago, on September 9, the 20-day correlation was a mere 0.14.
More ECB Easing is Coming – Waiting on Lagarde
ECB interest rate expectations have evolved in weeks to the runup to outgoing ECB President Draghi’s exit at the end of the month. At the start of August, there was a 53% chance for the ECB to lower its main deposit rate to -0.60% at the October ECB meeting; at the start of September, these odds were 48%. However, there is now 0% chance of a rate cut later this month.
European Central Bank Interest Rate Expectations (October 7, 2019) (Table 1)
Instead, overnight index swaps are pricing in a 87% chance of no change in rates at the October ECB meeting – and a 13% chance of a 10-bps rate hike. There is a 39% chance of a 10-bps rate cut before the end of the year, although overnight index swaps suggest that the next rate cut is most likely to come in January 2020 (57%). Of course, with outgoing ECB President Draghi set to be replaced by Christine Lagarde in a few weeks, it’s very possible that ECB rate expectations recalibrate once the new Governing Council takes shape.
EURUSD Rate versus COT Net Non-Commercial Positioning: Daily Timeframe (October 2018 to October 2019) (Chart 2)
Looking at positioning, according to the CFTC’s COT report for the week ended October 1, speculators increased their net-short Euro positions from 60.7K to 66K contracts. But the period closed before the rebound by the Euro at the end of the week; it is likely that there is a reduction in net-short futures positioning in the next COT report update on October 11.
IG Client Sentiment Index: EURUSD Rate Forecast (October 7, 2019) (Chart 3)
EURUSD: Retail trader data shows 56.0% of traders are net-long with the ratio of traders long to short at 1.27 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1221; price has moved 2.0% lower since then. The percentage of traders net-long is now its lowest since Sep 18 when EURUSD traded near 1.10307. The number of traders net-long is 4.2% lower than yesterday and 23.9% lower from last week, while the number of traders net-short is 27.3% higher than yesterday and 51.7% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
EUR/GBP May Rise if Brexit Hopes Continue to Fade
British Pound Outlook, Brexit, GBP/USD Technical Analysis – Talking Points
- British Pound may reverse recent gains if Brexit perils undermine confidence
- UK members of Parliament will be voting on Boris Johnson’s new Brexit plan
- Will DUP derail Johnson’s plan, and if so, will there be yet another extension?
Learn how to use political-risk analysis in your trading strategy!
The Euro may edge higher against the British Pound if hopes for an orderly Brexit continue to dissolve. On October 17, UK Prime Minister Boris Johnson and European Commission President Jean-Claude Junker jointly announced that a Brexit deal had been reached. Sterling rallied on the news, though its upside movement was curtailed by news that the Irish Democratic Unionist Party (DUP) would not support his plan.
Securing their support is essential if Mr. Johnson wants to pass a deal through the House of Commons. If he fails to do so, it could severely derail plans for an orderly Brexit which would likely see the British Pound reverse a significant portion of its recent gains. However, EU Council President Donald Tusk has not ruled out the possibility of an extension if lawmakers failed to agree on a deal on Saturday.
In Parliament there are currently 287 voting conservative lawmakers which Mr. Johnson will need if his proposal is to survive. He may also have to lean on over 20 former Tory MEPs who switched over to become independents. However, that may not be enough votes which may compel the PM to ask for help across the political aisle.
Market Analysis of the Day: Will the British Pound Reverse its Recent Gains?
GBP Index chart created using TradingView
FX TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter
Australian Dollar Firm After China GDP Miss But Trend Aims Lower
CHINA, GDP, TRADE WAR, AUSTRALIAN DOLLAR – TALKING POINTS:
- 3Q Chinese GDP registers narrowly worse than expected at 6.0% y/y
- Industrial production data, US trade talks may have offset the headline
- Australian Dollar little-changed but overall trend still pointing lower
Where will markets end 2019? See our Q4 forecasts for currencies, commodities and stock indexes!
The Australian Dollar found little of interest in mildly disappointing Chinese GDP data. The figures put the on-year growth rate at 6 percent, a hair lower than the 6.1 percent expected by economists. Nevertheless, this marks the slowest pace of expansion in at least 27 years.
Upbeat industrial production readings might have helped offset a soggy headline figure. The rate of on-year growth unexpectedly jumped to a three-month high of 5.8 percent. Early signs of stabilization in retail sales figures may have helped as well.
The report’s limited implications for larger macro themes dominating investors’ attention may likewise explain the tepid response. Extrapolating a view on future Chinese growth seems nearly impossible without greater clarity on trade negotiations with the US, making today’s release appear somewhat moot.
Assessing the broader landscape, choppy AUD/USD consolidation since early August leaves firmly intact a well-defined downtrend established from late December 2018. Prevailing monetary policy trends suggest it is likely to continue, with longer-term charts setting the stage for deep losses in the months ahead.
Daily AUD/USD chart created with TradingView
AUD/USD TRADING RESOURCES
— Written by Ilya Spivak, Currency Strategist for DailyFX.com
To contact Ilya, use the comments section below or @IlyaSpivak on Twitter
USD/JPY Rate Faces Bearish Reversal Pattern Amid Brexit Deal Hopes
Asia Pacific Market Open Talking Points
Find out what the #1 mistake that traders make is and how you can fix it!
AUD/USD, NZD/USD Climb as Japanese Yen and US Dollar Sink
The sentiment-linked Australian Dollar and similarly-behaving New Zealand Dollar soared against their major counterparts on Thursday. This was at the expense of the anti-risk Japanese Yen and haven-linked US Dollar. A rosy mood in stock markets, fueled by hopes of a Brexit deal, could have been the source of optimism from investors as the S&P 500 closed 0.28 percent to the upside.
During European trading hours, European Commission President Jean-Claude Juncker and UK Prime Minister Boris Johnson announced that a Brexit deal has been reached. However, optimism receded after officials from the Democratic Unionist Party (DUP) saying that they would not support Johnson’s agreement. Their support is crucial for Mr Johnson to pass his deal in Parliament perhaps on Saturday.
Still, the British Pound and Euro aimed nervously higher despite giving up some losses. Disappointing economic data out of the United States also likely fueled their gains against the US Dollar. Local industrial production unexpectedly declined 0.4 percent m/m in September versus -0.2% anticipated. US front-end government bond yields traded lower as markets kept their hopes up for further Fed easing.
Friday’s Asia Pacific Trading Session
Ahead, the Australian Dollar will be closely watching incoming third quarter Chinese GDP data after rosy local jobs data offered AUD/USD a boost. Data out of China has been tending to underperform relative to economists’ expectations, opening the door to a continuation of the trend. As a China-liquid proxy, the Aussie could reverse recent gains should weakness in growth from a close trading partner spread slowdown fears.
Join me later today at 1:45 GMT for LIVE coverage of China GDP where I will be going over the reaction in the Australian Dollar!
Meanwhile, the Japanese Yen will likely look past a set of local CPI data due to its limited implications for near-term BoJ policy action. Rather, it may focus more on China GDP and the mood in regional stock exchanges. S&P 500 futures are little changed with a slight downside bias heading into Friday’s APAC session. A bittersweet mood from investors may boost the Yen.
Japanese Yen Technical Analysis
The USD/JPY could be in the process of carving out a rising wedge candlestick formation. This is typically a reversal pattern and if so, may down the road open the door to downtrend resumption – as outlined in my Q4 USD/JPY forecast. As such, the latest test of the ceiling of the Rising Wedge may pave the way for a test of the floor which goes back to the end of August – red area on the chart below.
Chart of the Day – USD/JPY
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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter
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