The Euro currency lost ground versus all the G-7 crosses into the weekend in front of a busy week for Forex events.
The main catalyst for Friday’s slide was the disappointing Eurozone PMI reports. All together there were Purchasing Manager’s reports from 12 different EU members.
From a Forex trader’s perspective, the most significant miss was the German manufacturing PMI, which fell from 52.2 to 51.6. For the Eurozone as a group, the aggregate number fell to 52.0 compared with 53.1 in September. This is the lowest composite reading in over 2 years.
This broad-based weakness in the EU manufacturing sector will put the ECB in a tough spot in terms of their next monetary policy response.
ECB chief Mario Draghi is scheduled to speak twice this week before the G-20 Summit over the weekend.
When Mr Draghi takes the podium, Forex traders will be focused on two specific topics: have the weak PMIs signalled that the Q3 contraction has now spilled over to Q4, and will this weakness preclude the ECB from ending QE at the end of the year?
The ECB has been clear that the end of its asset purchasing program will be conditional to incoming economic data. That said, we understand this to mean that the hurdle to extending QE into next year would be very high and focused more on the Euro zone labour market than high frequency monthly reports.
Along those lines, ending the formal QE purchases next month does not mean the end of a stimulative ECB posture. The softer PMI numbers underscore the ECB’s need to extend an accommodative monetary policy. In this sense, the ECB benchmark will likely remain at -40 basis points until Q3 2019 with EU refinance rates holding near zero.
On balance, the ECB’s current monetary policy mix, combined with the simmering budget feud between the EC and Italy, will contribute to the weakening fundamentals for the EUR currency.
Technically, the EUR/USD reached a three week high near 1.1470 last week before reversing down to 1.1320 on Friday. The daily RSI is at 44 and pointing lower with the pair below the 30-day moving average of 1.1390. We are currently short EUR/USD with an initial target of 1.1215 and a 1.1495 stop.
The ongoing Brexit saga will continue this week as the UK Parliament will vote on the 585 page agreement that was approved by the EU over the weekend. Early indications suggest there will be heated debate from both sides with one Brexit supporter saying that staying in the EU is better than the exit agreement now on the table … which was probably the EU’s goal all along.
The GBP/USD has been edging lower in early trade with initial support now in the 1.2760 area. We remain short from 1.2880 with an initial target of 1.2610 and a 1.2990 stop.
After rallying over 3.5% over the last three weeks, the AUD/USD is now at an important inflection point. The recent rebound from .7000 has stemmed a 15% down move dating back to March. The internal momentum indicators have turned negative and a break of the .7180 level could extend to .7120.
We suggest holding short from .7255 with an initial target of .6970 and a .7335 stop.
The USD/JPY remains in a tight trading range with pair covering less than 100 points for the week. With global equities still looking to trade lower, we prefer the short side of the pair. We are currently short from 113.25 with an initial target of 110.35 and a 114.75 stop.
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