The , for all its faults and problems, isn’t ‘the problem child’ at the present moment: that title goes to the , by a wide margin. That in and of itself is the overarching theme guiding the Euro right now: the Euro itself isn’t driving its own performance! Aside from Brexit, traders are focused on: how incoming US economic data will shift Fed rate hike expectations for December (); and whether or not the Bank of Japan will be able to convince market its not losing control of its expansive monetary policy ().
None of these factors should change this coming week. The British Pound will continued to be plagued by higher two-way volatility as markets reprice a ‘Hard Brexit’ outcome to the upcoming negotiations, set to begin by March 2017, according to UK Prime Minister Theresa May. Soft headline US jobs growth amid an otherwise good September labor market report should likewise have investors balancing concerns over the US Presidential election with the high likelihood the Federal Reserve hikes rates 25-bps December. Finally, with the Bank of Japan seemingly losing control, every rumor and quote taken out of context will have tremendous sway over the Japanese Yen.
Now that ECB policymakers have turned their attention to whether or not their easing programs are working as intended, with ECB President Draghi emphasizing the Governing Council’s commitment to its easing policies, any negative weight should be lifted from the Euro. Even if the ECB makes adjustments to its QE program (as detailed in our Q4’16 quarterly forecast), there may not be a significant impact on the Euro itself unless another rate cut is brought forth. For the past month, there’s been less than a one-in-four chance of a 10-bps rate cut by December.
Like last week, there aren’t many meaningful Euro-Zone data due out over the coming days either, so traders’ collective attention shouldn’t be trained on the economic calendar. Instead, with central banks and politicians across the developed economic world seemingly losing control, the Euro will be driven by speculation around the British Pound, Japanese Yen, and US Dollar, whose thematic influences are far more compelling in the near-term.