The euro is weak this morning, as markets digest news of anti-immigration parties winning elections in Austria and Catalonia refusing to define its position regarding independence. As political uncertainties continue to weigh on the common currency, the euro is weakening as a result. Last week's Bloomberg story that the ECB is considering extending QE until at least September 2018 "according to officials familiar with the debate" had a limited impact on the euro. We downgraded our short-term outlook on the euro from bullish to neutral this morning.
The EUR/USD exchange rate is now below 1.1790, having peaked above 1.1850 earlier last week. Looking at EUR/JPY, the pair was down last Friday (and is down again today) and is currently just below 131.80. The euro is also trading down against the pound, with EUR/GBP now trading below 0.8870.
This is a fairly critical week for the Eurozone. On Monday, Spain’s deadline to Catalonia seeking clarification regarding its earlier declaration will expire. If Catalonia declares independence or fails to respond, Spain may trigger Article 155 (dismantling the government of Catalonia). Trade balance figures for August will also be announced on Monday. On Tuesday, we’ll see German wholesale prices and economic sentiment surveys. From the Eurozone, we’ll get September CPI figures on Tuesday. Finally, the European Council Meeting is scheduled for October 19 and 20 (Thursday and Friday). Given the ongoing Brexit negotiations, the outcome of the meeting will be watched closely. German producer prices will also be announced on Friday.
After rallying in the second week of October, our medium-term outlook on the euro is now neutral. The currency is appreciating as the ECB is expected to announce its decision to taper quantitative easing next year. Recently, Catalonia's president also avoided a unilateral declaration of independence, choosing instead to call for dialog while accepting the mandate of the referendum. We continue to believe that the euro is overbought, based on various technical indicators when looking at a weekly chart.