The lack of notable economic data today should not mean a lack of opportunities for traders, as several markets have behaved nervously all week. The EURUSD has been rising all week after reaching 1.25 last Friday, and after almost touching 1.28.
Economic chill ... sanctions imposed on Moscow and Russian retaliation have hurt the outlook for Finland, and may prompt a ratings downgrade for the Nordic nation. Photo: Thinkstock
This is the largest swing higher since the EURUSD turned down from the 1.40 level, which should make many EURUSD bears nervous.
EURUSD chart
Chart: Saxo Trader
Remember, last Wednesday’s Federal Open Markets Committee September meeting minutes were dovish. Investors may have begun to have second thoughts about whether the European Central Bank cam overcome German resistance to its asset purchase plans.
There is a strong chance that the price action shows the bear trend in the EURUSD is over for now, and usually turnarounds have been quick and surprising. If the 1.27 area holds and the pair begins a new swing higher, then traders should be ready for it.
The Federal Reserve’s Charles Plosser (13:00 GMT) and Esther George (16:00 GMT) will be speaking today, and they could add more weight to arguments that the Fed is in no hurry to tighten, given the worsening global outlook and the stronger dollar.
This morning, August industrial production data for France (06:45 GMT) and Italy (08:00 GMT) are worth watching, though they probably won’t be pretty.
Annual IMF and World Bank meetings
The 2014 annual meetings of both the International Monetary Fund (IMF) and the World Bank Group begin today and run until Sunday. The IMF has updated its World Economic Outlook (WEO) and other documents ahead of the meeting. The reports lowered growth forecasts for 2014 and 2015, emphasized downside risks and said Europe has a 40% chance of slipping back into recession.
On top of the usual cries for structural reforms, the IMF stated that infrastructure investments in countries that can afford them would make a lot of sense, something that the US economist Lawrence Summers called the “free lunch”
Both France and Italy are currently in violation of Eurozone's strict budget deficit limits, and have been given plenty of leeway already. France's Pierre Moscovici, the EU commissioner-designate, said he is “ready to step up disciplinary action”. And the European Commission is rumoured to be unlikely to accept Italy’s budget plan.
Both countries have until October 15 to submit their 2015 budgets to the European Commission. Germany has remained adamant about its approach and balanced its own budget, and praised the agenda of austerity and reforms for crisis countries as well. So the big surprise out of the weekend’s meetings would be if Germany signalled that it would be willing to begin spending on its infrastructure – or better yet, be prepared to allow France and Italy to do so.
Even though Germany’s ruling political parties face the threat from the eurosceptical Alternative for Germany (AfD) party, and any deviation from the austerity dogma would increase the AfD’s support, at least Chancellor Angela Merkel could pretend that the country is easing its stance “based on IMF’s advice”.
Possible rating downgrades (after Europe’s close)
Credit rating agencies could drop a bomb today after the European close. Possible rating action on Finland (S&P: AAA, outlook negative), France (S&P: AA, stable), Italy (Moody’s: Baa2, stable), Portugal (Fitch: BB+, positive).
The European rules state that "the rated entity should be notified during working hours of the rated entity and at least a full working day before publication of the credit rating or the rating outlook".
Perhaps the recent nervousness in Paris and Rome are due to an upcoming announcement?
In Finland the latest economic data have been bad, and the Ukrainian crisis and sanctions against Russia – and Russian retaliatory sanctions – have damaged the outlook further. My guess is we could see Finland’s rating downgraded today, and a switch to a negative outlook for France and/or Italy would not be far-fetched.
Normally, such changes would present no significant challenges, but now they come at a politically awkward time, as the governments in France and Italy are weak, and Finland is preparing for a general election next spring.
UK August Trade Balance (08:30 GMT)
The trade deficit is expected to have dropped slightly for August to 9.6 billion pounds, from July’s 10.2 billion pounds. The UK’s current account deficit and strong recovery have led to some worries that the much-dreaded first interest rate hike since the country’s recovery began is drawing near.
Still, even if the deficit has not narrowed according to expectations I find it doubtful that investors would begin to speculate that a rate hike has become more probable, as the weak Eurozone outlook is also imposing constraints on economic prospects in the UK. 