The euro continues to weaken, especially relative to the US dollar. We wrote earlier that the currency is likely to stay subdued given the ongoing tensions in Catalonia. Looking at data, German ZEW business surveys yesterday missed expectations. The current situation survey (87 vs 89 expected) and the sentiment survey (17.6 vs 20 expected) were both below average estimates. Eurozone inflation numbers were mostly in line with expectations. Year-over-year CPI came in at 1.5% (matching estimates), while core CPI was slightly above estimates (1.3% vs. 1.1% expected). Given strength in US economic data and good news from Washington, rising US bond yields further dampened interest in the euro. We remain bearish on the currency in the short-term.
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 down yesterday and is up this morning. EUR/JPY is currently just above 132.30. The euro is up against the pound today, with EUR/GBP now trading above 0.8920.
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). Tuesday's German ZEW surveys were disappointing while inflation figures matched expectations. The current situation survey (87 vs 89 expected) and the sentiment survey (17.6 vs 20 expected) were both below average estimates. Year-over-year CPI came in at 1.5% (matching estimates), while core CPI was slightly above estimates (1.3% vs. 1.1% expected). 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.