Fundamental Forecast for the Euro: Neutral

  • The Euro saw mixed gains across the board amid another meltdown by the Japanese Yen and a tentative rebound by the British Pound.
  • The economic calendar is lighter, although September Eurozone inflation data is of utmost importance.
  • According to the IG Client Sentiment index, the Euro has a mostly mixed bias against its major counterparts.

Euro Week in Review

The Euro produced mixed results as the calendar turned through the middle of October. EUR/USD rates were relatively tame, closing lower by -0.22%. The big movers were EUR/JPY and EUR/GBP rates, thanks to another sharp leg lower in the Japanese Yen and some tentative relief around the UK fiscal situation following the resignation of UK Chancellor of the Exchequer Kwasi Kwarteng: the former gained +2.11%; and the latter lost -0.97%.

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Eurozone Economic Calendar Quiet

The European economic calendar is fairly light in the week ahead, and the real fireworks will arrive later this month when the European Central Bank meets for its October rate decision. Nevertheless, there is at least one data release on the calendar that should spark traders’ interest in the coming days, given the impact it could have on the October ECB meeting.

  • On Monday, October 17, the final September Italian inflation report is due at 8 GMT.
  • On Tuesday, October 18, the October German and Eurozone ZEW sentiment indexes will be released at 9 GMT.
  • On Wednesday, October 19, the final September Eurozone inflation report will be published at 9 GMT. Notably, the month-over-month reading is expected to double (from +0.6% to +1.2%) and the year-over-year reading is expected to reach double digits (from +9.1% to +10%).
  • On Thursday, October 20, there is a European Council Meeting beginning at 8 GMT.
  • On Friday, October 21, the European Council Meeting continues at 8 GMT, while the flash October Eurozone consumer confidence report is due at 14 GMT.
  • On Saturday, October 22, ECB President Christine Lagarde will give remarks at 9 GMT.

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For full Eurozone economic data forecasts, view the DailyFX economic calendar.

ECB Rate Hike Expectations Jump

ECB policymakers may not be dealing with dysfunctional bond markets to the degree that the Bank of England has been recently, but like the BOE, they are attempting to raise interest rates to curtail multi-decade highs in inflation rates ahead of a recession in the Eurozone.As recession fears mount, however, the runway that the ECB has to try to raise rates is starting to shrink, leaving policymakers with a stagflation quandary: raise rates to try and lower price pressures at the risk of a more severe economic contraction; or halt rate hikes, running the risk of persistently higher inflation, in order to prevent a sharp recession.

Read more: Central Bank Watch: BOE & ECB Interest Rate Expectations Update

French, German, Greek, Italian, Portuguese & Spanish 10-year Yields (October 2020 to October 2022) (Chart 1)

Persistently high inflation rates across developed economies, aggressive tightening efforts by major central banks, and now bedlam in UK Gilt markets have spilled over to European bond yields. Across the Eurozone, sovereign debt has come under pressure, reaching their lowest prices/highest yields in several years. For the time being, global market participants are acting unconcerned by the development – the murmurs of a resurrected Eurozone debt crisis have died down – but further weakness in periphery debt, mainly Greece and Italy, could soon become more problematic for the Euro.

CFTC COT Euro Futures Positioning (October 2020 to October 2022) (Chart 2)

Finally, looking at positioning, according to the CFTC’s COT for the week ended October 11, speculators decreased their net-long Euro positions to 36,533 contracts from 45,068 contracts. Euro positioning is coming off of its most net-long level since the middle of June.

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— Written by Christopher Vecchio, CFA, Senior Strategist

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