The Euro was pressured across the board last week, weighed down further after the ECB cut the benchmark interest rate to 0.75% a historical low, and the deposit rate to 0%. Draghi also sounded dovish during his statement, noting heightened uncertainly possibly leaving room for more rate cuts. What can effect the Euro this week?
There are 3 types of event risks for the EUR:
1) Euro economic data: Poor data continues to weigh on the euro, increasing prospect of further rate cuts. But there is a point where the market might look for central bank help, and confirming headlines from ECB officials can flip terrible economic data into hope.
2) Headlines on the latest development of the eurozone crisis and the anti-crisis solution, complications etc. The optimism from the EU summit seems to have fizzled, but the panic has settled as well. However nerve centers like the Spanish and Italian bond yields and the terms of EFSF and ESM funds to support banks are key headlines that can shake things up.
3) Global growth, with focus on China. China surprised markets with another rate cut last month. Negative outlook has been building up for China’s economy. It has been looked at as the tide that’s been floating all boats, so poor China data came also weigh on the EUR, and boost safe haven currencies like USD and JPY. But again, the counter-intuitive prospect of terrible news inviting monetary stimulus measures apply.
Here is a screenshot taken from Forexfactory on some scheduled key event risks this week (click for the full size).
Inflation in China has been sliding sharply from the 6.4% reported 7/8/2011 (for June, 2011). The inflation data that just came out today (7/8 in the US), shows continuing disinflation. With PPI showing deflation, China looks to be geared up for further rate easing and monetary stimulus measures.
Sentix investor confidence for July is expected to be -26.3, just a slight improvement from -28.9 in June. This index has been negative since August 2011. This won’t be surprising, but if the number dropped further instead of improve, we can expect bearish action to be unimpeded.
Draghi speaks at Brussels. The market wants to hear clues on next policy move be it rate cut, or LTRO 3 or any measures to complement sovereign anti-crisis efforts. Having unconventional tools at disposal is no longer meaningful. But, acknowledgement of worsening conditions with subdued inflation might be interpreted as paving the way for actual use of these monetary measures.
Trade balance can reveal developments in the economy. Export component will show world demand for Chinese goods. Import component will show internal demand, so it’s not just the balance, but the absolute change in export and imports that might be key within this release.
New Loans data might not be the biggest mover, but can also reveal development in Yuan as an up and coming reserve currency.
There is French industrial production data. Maybe not as key as the ECOFIN meeting. This should produce some headline risks regarding the debt crisis, and the latest solutions/agreements made from the EU summit.
The German 10-yr bond auction is not as key as Spanish and Italian ones, but can reveal whether the market is pricing in a tighter banking union going forward. If so, the yields should rise because of the higher risks from periphery nations. Lower yields show that the market is still looking for safety in Germany and is anticipating more euro breakup, especially if Spanish and Italian yields go the opposite direction (up).
European industrial production is expected to be flat for May after -0.8% in April. A lagging indicator, so not the most key data here. Again, flat to negative reading should not impede price action if it is bearish.
Draghi speaks at a seminar. Not necessarily going to reveal much about next interest rate policy. Still should be monitored.
China: (really Friday for China)
GDP Q2 (year-on-year) expected to be 7.9%, after the Q1 (y/y) GDP of 8.1%. This is a key release for China and global growth. Though no where near recessionary numbers, a slowdown of this behemoth means less investments abroad and slowing of global activity.
Mind these event risks for Euro, trade safe and trade well.
Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes – provider of rex News, Analysis, Education, Videos, Charts, and other trading resources.
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