Corona presses on euro

Comment by Ranko Berich, Monex Europe


New lockdown measures and an ever-rising case count have made it challenging for the euro to hold onto last week’s gains, while the US fiscal impasse has weighed on risk sentiment. Yesterday’s ZEW survey expectations index from Germany printed a big miss at 56.1 down from last month’s 77.4. While markets had no expectations of the figure exceeding last month’s 20-year high, the median of forecasts submitted to Bloomberg still stood far higher at 72.0. With any positivity stemming from the data point more than offset by a bleak current expectations index and the announcement of further lockdown measures, EURUSD did not show an immediate reaction to the release. In the evening, the Netherlands announced a partial lockdown, with cafes, bars and restaurants to be shut for at least the next four weeks. For today, the focus turns to the eurozone industrial production from August. According to Bloomberg’s consensus, the year-on-year figure is set to remain broadly unchanged at -7.0%, but the month-on-month number is expected to show a sharp contraction from 4.1% in July to 0.8% in August. With the virus situation in the eurozone having only worsened since August, a better-than-expected reading may be taken with a pinch of salt as chances are industrial output has only deteriorated since then.


The dollar has managed to maintain some of the tentative momentum it began to pick up at the beginning of the week over the past 24 hours, making progress against NOK, SEK, and AUD among others. The prospects for further fiscal stimulus before the Presidential election seem to have dimmed further, after Democrat House Speaker Nancy Pelosi once again rebuffed the latest offer of stimulus from the White House. Pelosi reportedly warned that any deal offered by Trump would cut back on Democrat policy priorities, and in a letter to colleagues said “the President only wants his name on a check to go out before Election Day and for the market to go up”. The US data calendar began to pick up again yesterday after Monday’s public holiday, with the NFIB small business optimism index rising to 104.0, the highest reading since March.


After posting nearly a full percentage point decline in yesterday’s session, sterling continues to trade on the back foot this morning where it is already down over 0.4% against the dollar. Yesterday, concerns around Brexit negotiations continued to drive the pound lower as Boris Johnson’s self-imposed Brexit deadline, Thursday the 15th October, rapidly approaches with no deal in sight. Areas of contention such as state aid and fishing rights are yet to be bridged, meaning a narrow trade deal ahead of tomorrow’s EU summit is unlikely. While both sides agreed that the hard deadline for talks to conclude is the end of October, allowing enough time for businesses to adjust and legislatures to ratify the deal into domestic law, Johnson previously stated that the UK is ready to “walk away” if negotiations don’t bear fruit prior to tomorrow’s summit. Yesterday’s headlines suggest that the EU summit will begin without a deal in place, meaning market pricing reflects investors merely bracing for the potential fallout. However, there is a risk that this hard rhetoric from Johnson is just that - rhetoric.

The game of brinkmanship has kept markets guessing, and with both eurozone and UK economies ailing from the Q2 hit, the broad consensus remains that talks will continue until the end of the month. The hard stance taken by Johnson may have been to rush negotiations along, or even force the EU’s hand towards offering more concessions in trade talks, however, the risk remains that tomorrow’s EU summit spells the end of trade negotiations and thus the beginning of no-deal exit preparations. The focus will be on headlines ebbing from trade negotiations today, while the Prime Minister takes questions in parliament at 12:00 - 13:00 BST.