The euro enjoyed a small rebound last Friday, and is flat against most major currencies this morning. EUR/GBP is the exception, as the euro is clearly weakening against the pound this morning. Looking at news there were large pro-unity protests in Spain over the weekend, as Spanish residents called for negotiations instead of violence. Catalan leader Puigdemont is set to address the regional parliament tomorrow, and may put into motion a parliamentary vote that would ultimately declare Catalonian independence. Later this week, Draghi is scheduled to speak on Thursday. As the euro is looking oversold to us, and particularly against the dollar, any sign that the ECB is set to announce tapering can help EUR/USD rebound towards 1.18. We recently upgraded our short-term outlook on the euro to neutral.
The EUR/USD exchange rate is now above 1.1720. Looking at EUR/JPY, the pair is down slightly and is currently just above 132.0. Despite recent pound weakness, the euro is down against the pound this morning, with EUR/GBP now trading below 0.8940.
This is a fairly light week for the euro in terms of economic data releases. The most important day this week is Thursday, which will include industrial production figures and a speech by Draghi. Speculators who are long euros continue to patiently wait for the ECB to announce that it will taper its quantitative easing program later this year. Thus Draghi’s speech will be watched closely for any clues that the upcoming ECB meeting will contain the big announcement that speculators have been waiting for.
After falling into short-term oversold territory, the euro staged a small rebound on October 6. As such, we are upgrading the currency to neutral. Risks from Spain's Catalonia region are also falling as the regional government has not pursued a unilateral declaration of independence. Looking at technicals, the currency remains 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.