The euro rose yesterday and continues to strengthen this morning against all major currencies, except the British pound. While there are few new developments directly relating to the euro, hopes are rising given today's critical ECB meeting. In our preview of the event, we wrote that while expectations for the ECB remain high, there is a relatively higher risk of a downside surprise given the ECB's historical aversion to a strong currency. Unless the ECB announces a clear end date to its asset buying program, the euro is more likely to struggle following the event. Looking at economic data, yesterday's IFO survey results were quite good. The results beat expectations in all categories (expectations, current assessment and business climate).
The EUR/USD exchange rate is now above 1.18 and is trading close to 1.1830. Looking at EUR/JPY, the pair is approaching short-term overbought territory. The pair is currently trading just below 134.20. The euro is up slightly against the pound today (after falling sharply yesterday), with EUR/GBP now trading below 0.8920. The pound is broadly stronger following good GDP figures released yesterday.
Given the upcoming ECB meeting later today, this is a big week for the euro. On Tuesday, Eurozone Manufacturing PMIs beat expectations (58.6 vs. 57.8 expected) while services and composite figures were below estimates (55.9 vs. 56.5 expected). Wednesday's IFO survey covering expectations (109.1 vs. 107.3 expected) beat average estimates. Later today, the ECB is expected to make a policy statement and stage a press conference. Given high expectations for the ECB to begin tapering its quantitative easing program, the statement and the press conference will be closely followed by financial markets.
In the fourth week of October, the euro remains in a holding pattern as markets await the ECB's monetary policy decision on October 26. As such, we are now neutral on the currency in the short-term. 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. While the currency looked overbought in mid-October, this is no longer the case today and the euro is trading within normal ranges. This is based on various technical indicators when looking at a weekly chart.