The euro has disappointed since the latter half of last week. The currency continues to weaken this morning, particularly against the US dollar. Despite yesterday's deadline, the Catalonian president refused to clarify whether or not he was formally declaring independence. The deadline has been extended to Thursday 10AM CET. Spanish stocks and bonds fell on the news. Given that the currency will be weighed down by political uncertainties this week, we have downgraded our short-term outlook to bearish. Beyond political news, there have been no recent news stories regarding the ECB's likely tapering announcement later this month. Last week, Bloomberg reported that the ECB is considering extending QE until at least September 2018 "according to officials familiar with the debate".
The EUR/USD exchange rate is now below 1.1770, having peaked above 1.1850 earlier last week. Looking at EUR/JPY, the pair was up mildly yesterday, but is down this morning. EUR/JPY is currently just below 132.0. The euro is also trading down against the pound, with EUR/GBP now trading below 0.8880.
This is a fairly critical week for the Eurozone. On Monday, Spain’s deadline to Catalonia seeking clarification regarding its earlier declaration expired. The deadline was extended to this coming Thursday (10AM). If Catalonia declares independence or fails to respond, Spain may trigger Article 155 (dismantling the government of Catalonia). Monday's trade balance figures for August were lower than the previous reading (16.1b vs. 23.2b). 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 continued weakness in mid October, we are downgrading the euro to bearish. The currency has been broadly weakening since October 12. Looking at various technical indicators, the currency is neither oversold nor overbought and is trading within normal conditions.
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.