Fundamental Forecast for the Euro: Neutral
– The highest rated Euro-centric data due out this week are the ZEW surveys on Tuesday, although the March PMIs due out on Friday are likely to generate the greatest market reaction among the EUR-crosses.
– Improving European economic data may help spark a short covering rally in the EUR-crosses; per the CFTC’s COT report, speculative short positions are coming off of their highest level in three years.
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Despite enduring significant losses at the start of the month around the March European Central Bank policy meeting, the Euro has been on a bit of a tear the past week-plus. As the calendar turned into the ides of March, only EURGBP posted a negative performance over the week, closing down by -1.29% as the latest Brexit developments pointed to a potential delay in the process beyond the original March 29 deadline.
Since hitting a fresh yearly low on March 7, EURUSD has gained in five of six sessions; meanwhile EURJPY has gained in four of the past six (its yearly low remains the January 3 Yen flash-crash low).
Economic Data Momentum Continues to Improve
An objective look at European economic data shows that conditions have continued to improve, relatively speaking, over the past few weeks. In recent days we’ve seen January German trade data and January Eurozone Industrial Production figures come in better than economists’ forecasts. As a result, heading into the coming week, the Citi Economic Surprise Index for the Eurozone has moved up to -34.1 from -49.5 one week earlier, up further from -79.7 on February 15.
Stability in Energy Prices Helping Anchor Inflation Expectations
Stability in the conditions around inflation may be helping support the Euro’s recent rebound. ECB President Mario Draghi’s preferred measure of inflation, the 5-year, 5-year inflation swap forwards, closed last week at 1.466%, slightly higher from where it was one month earlier at 1.438. The ongoing rebound in energy prices seems to be helping, with Brent Oil prices up by +1.4% since February 15.
‘Barbell’ Economic Calendar in Week Ahead for Euro
The Eurozone economic calendar for the coming week is shaped kind of like a barbell: traders will want to pay attention to data due out on Tuesday and on Friday, with little practical need to pay attention to any release in between. The March Eurozone and German ZEW Surveys on Tuesday may help shine some light on how institutional investors feel about the recent turn in economic data, particularly after the ECB’s announcement for another TLTRO program. On Friday, the preliminary March Eurozone PMI reports, on balance, are expected to show signs of a modest uptick in growth conditions (Composite due in at 52 from 51.9).
EURGBP to Stay at Center of Attention
The middle of the week will be defined by what’s happening in the secondary pair in EUR-crosses. EURGBP will be of particular interest, given the UK inflation report for February due out on Wednesday and the March Bank of England meeting on Thursday.
Furthermore, one can’t dismiss the impact that the Brexit negotiations are having on the broader EUR-complex: good Brexit news means EURGBP likely depreciates; when GBP leads EUR, other EUR-crosses have tended to outperform. And vice-versa: bad Brexit news means EURGBP likely depreciates; when EUR leads GBP, other EUR-crosses have tended to underperform.
Middle of Week Sees Fed Meeting (Among Others)
Elsewhere, EURUSD will likely see volatility swell on Wednesday with the March Fed meeting. Although no policy change is expected, a new Summary of Economic Projections (growth, inflation, unemployment, and rate forecasts) typically generates a decent reaction in FX markets. Similarly, Fed Chair Jerome Powell’s press conference should keep things interesting on Wednesday afternoon.
Beyond the two major EUR-crosses, traders will want to have EURAUD on their radar on Thursday when the February Australian jobs report is released, especially as rates markets shift pricing around the next expected Reserve Bank of Australia move (according to overnight index swaps, 54% chance of a 25-bps rate cut before August).
Lastly, with signs (including in the Eurozone) of stability in energy prices filtering through to stability in inflation readings, traders will want to pay particular attention to EURJPY on Thursday when the March Japanese inflation report is released and to EURCAD on Friday when the March Canadian inflation report is made public.
Positioning Data No Longer Lagging – Short Covering Rally Soon?
Finally, looking at positioning, according to the CFTC’s COT for the week ended March 12, speculators decreased their net-short Euro positions to 75.6K contracts, down from the 78.2K net-short contracts held in the week prior. It’s worth noting that we’ve recent come off of a three-year high in net-shorts. Given the current backdrop, one can’t dismiss the possibility of a short covering rally in the coming weeks.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at [email protected]