Euro Regains Some Momentum

Euro regains some momentum

• The euro surged yesterday, recovering a large part of its recent losses. The move began after Germany reported better-than-expected growth numbers for Q3, and continued for most of the day. ECB’s Draghi also delivered remarks during the European morning, but his comments fell short of addressing future ECB policy and thus, we doubt they had much to do with the move. Looking forward, with the ECB on a relatively steady path until September 2018, we expect the euro’s forthcoming direction to hinge mainly upon the prospect for institutional reforms in the EU. Specifically, French President Macron and EU Commission President Juncker have repeatedly called for the creation of a shared budget among member countries, as well as introducing the position of a Eurozone finance minister. German politicians, and most notably Merkel, have noted they are open to these propositions. That said, for such reforms to come into focus, Germany needs to form a government first. This process has been delayed quite notably, but now appears to be entering its final stretch, with an outcome likely to be announced within the coming weeks.
• EUR/USD surged yesterday from near the 1.1660 (S2) barrier, to hit resistance near 1.1795 (R1). In our view, the rate is now trading back within the neutral territory between 1.1660 (S2) and 1.1830 (R2) and thus, we prefer to take the sidelines for now. Having said that, given that yesterday’s rally appears overstretched, we see the case for a retreat within the aforementioned range, perhaps for a test near 1.1730 (S1). However, before we start examining the case on whether the picture has turned back negative, we would like to see another clear dip below 1.1660 (S2). On the upside, a decisive close above 1.1830 (R2) could be a first sign that the slide started on the 8th of September was just a corrective retreat.

Oil sinks as IEA downgrades forecasts

• Oil prices plunged yesterday, following the release of updated forecasts from the International Energy Agency (IEA). The agency trimmed its demand forecasts for this year and the next, indicating among other factors that the rally in prices since June is likely to curb future demand. It also noted that as a result of this, global supply will continue to exceed demand for longer than previously anticipated, casting a shadow on the recent narrative that the oil market is rapidly rebalancing itself. Moving forth, markets will probably begin to focus even more on the end-of-November OPEC and non-OPEC meeting, where producers are widely expected to extend the current deal by 9 months. As we draw closer to that gathering, we expect investors to begin scrutinizing comments from the various ministers and officials, for any hints as to what the producers will actually deliver. Of course, any developments in Saudi Arabia will also be closely tracked, given the recent headlines of turmoil.
• WTI tumbled yesterday, breaking below the support (now turned into resistance) territory of 56.45 (R2) to breach briefly the key barrier of 55.30 (R1). That level acted as the upper bound of the sideways range we’ve discussed several times in the past, which capped prior oil gains. As such, we change our view to flat for now, as WTI could continue its slide within the range and perhaps challenge the 54.00 (S1) support soon. That said, the price continues to trade above the upside support line taken from the low of the 31st of August, which still keeps the door open for a rebound in the foreseeable future, even if oil retreats a bit more within the aforementioned range.

Today’s highlights:

• In the UK, the employment report for September is due out. The unemployment rate is forecast to have held steady while average weekly earnings excluding bonus are expected to have accelerated somewhat. Although a solid employment report could help GBP to recover some of its recent losses, we still believe the key driver of sterling in the near-term is likely to be any developments in the Brexit negotiations, or the lack thereof.
• In the US, the main releases will be CPI and retail sales data, all for October. Kicking off with the CPIs, the consensus is for the headline rate to have declined, while the core rate is expected to have held steady. We share the view for a pullback in the headline number, while we view the risks surrounding the core forecast as tilted to the downside. We base that view on the Markit services PMI, which showed inflation easing to a six-month low. Even if we do see a modest pullback in these rates though, we doubt this will be enough to materially curb market expectations regarding another rate hike this year. At this point it appears that only something catastrophic could derail the Fed’s December plans. Still, it could bring further down the number of hikes that are priced in for 2018 and thereby, weigh on USD. With regards to retail sales, the forecast is for a sharp slowdown in both the headline and the core prints, which could exacerbate any potential USD-negative reaction due to soft CPIs.
• We have two speakers on the agenda: BoE MPC members Andy Haldane and Ben Broadbent.

EUR/USD

Support: 1.1730 (S1), 1.1660 (S2), 1.1615 (S3)
Resistance: 1.1795 (R1), 1.1830 (R2), 1.1880 (R3)

WTI

Support: 54.00 (S1), 53.00 (S2), 52.00 (S3)
Resistance: 55.30 (R1), 56.45 (R2), 57.70 (R3)