The euro is trading sideways today. Markets are starting to recognize political risks in Catalonia, with Spanish stocks and bonds both falling yesterday. While the euro remains subdued for now, an escalation in the ongoing crisis has the potential to spread to the currency market. Yesterday's Eurozone PMI numbers were strong, and suggested that the ongoing economic expansion continues. While business sentiment appears positive, retail sales data was surprisingly weak. Eurozone retail sales are at their lowest levels of growth in over 2 years.
EUR/USD is flat today, with the pair now trading below 1.1760. Looking at EUR/JPY, the pair has been flat for several days in a row now, with the pair currently around 132.50.
In economic data, Monday'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. on Tuesday, producer prices beat expectations (2.5% vs. 2.3% expected) suggesting that rising inflation may be around the corner. Finally, on Wednesday we saw strong Markit composite PMIs and weak Eurozone retail sales figures.
Despite the political drama in Catalonia, the euro is bouncing back after entering oversold territory earlier this week. We are now neutral on the common currency. Earlier, we were bearish following the referendum in Spain's Catalan region and the ECB's hesitation to turn hawkish. Looking at technicals, the currency looks oversold based on the daily chart of the euro currency index.
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.