The euro continues to sell off this week, following the drama of the independence referendum in Catalonia over the weekend. Yesterday, ECB chief economist Praet called for a more cautious approach when considering changes to QE in a speech. Recent indications from the ECB are dampening the market's expectations of future interest rate hikes, thus leading to continued euro weakness. Spain-related stocks and bonds also suffered yesterday given the events in Catalonia.
EUR/USD is now trading just above 1.17. The pair last traded at similar levels back in August this year. EUR/JPY has been flat for several days in a row now, with the pair currently around 132.40.
In economic data, yesterday's manufacturing PMIs and unemployment figures both missed expectations (but to a very small degree). Unemployment came in at 9.1% vs. 9% expected while Markit manufacturing PMIs came in at 58.1 vs. 58.2 expected. Later today, we'll get producer prices. Finally, on Thursday we'll see Markit composite PMIs and Eurozone retail sales figures.
We are downgrading the medium term outlook on the euro to bearish, after many months of maintaining a positive or neutral outlook on the common currency. The euro began its most recent sell-off following the German elections on September 24. The euro has been particularly weak against the US dollar, which is now rebounding after many months of weakness. We continue to believe that the euro is overbought, based on various technical indicators when looking at a weekly chart.