The euro is weaker today, particularly against the US dollar and the pound. As bond yields rise, the US dollar is strengthening against most other currencies. Looking at news, Madrid has announced it will suspend Catalonia's autonomy by triggering Article 155 this Saturday. Catalonia has refused to state that it will not declare independence. Meanwhile, Merkel has stated that "the process [Brexit negotiations] is moving forward step-by-step" and "it’s encouraging enough to continue working in order to reach the beginning of the second phase in December". Her comments helped support the pound, particularly against weaker currencies including the euro and the yen.
The EUR/USD exchange rate is now above 1.1810, but was lower than 1.18 earlier in the day. Looking at EUR/JPY, the euro is up again versus the yen today. The pair is currently trading above 133.70. The euro is down against the pound today, with EUR/GBP now trading below 0.8970.
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 rising sharply on October 19, we are upgrading the euro to bullish. Previously, the currency had 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.