KTM FX Weekly: Volatility expected in the next two weeks
Most of the significant euro crosses ended lower as the September ECB meeting failed to produce surprises. The euro declined 0.60% against the dollar as US yields were on the rise. Looking ahead, the euro will ignite higher volatility ahead of the FOMC meeting on September 22, and the German election looms on September 26. Overall, we are going to end this month in a new dimension in terms of price action.
- Five G10 central bank meetings are scheduled between 20-24 September; FOMC on September 22.
- German election on September 26
Let’s quickly review the past week’s ECB meeting. In a nutshell, Lagarde will start the tampering soon-timing still unknown. But economists and market participants penciled we could know the timing in Q4 2021.
Last week’s ECB meeting was essentially in line with most of the economist’s forecast, so it was already priced in. Euro reaction was largely unchanged post the meeting, with bund yields ended lower slightly.
Monetary policy decision:
The Governing Council confirmed a moderately lower pace of net asset purchases under the pandemic emergency purchase program (PEPP) than in the previous two quarters.
Net purchases under the APP will continue at a monthly pace of €20 billion.
The Governing Council will continue to conduct net asset purchases under the PEPP with a total envelope of €1,850 billion until at least the end of March 2022.
Highlights from its Staff Macroeconomic Projections:
Inflation Outlook: Inflation is expected to average 2.2% in 2021, driven by temporary upward factors. As per projections, ECB’s forecast for 2021 revised higher to 2.2%, from 1.9%, for 2022 to 1.7% from 1.5%, and that for 2023 to 1.5% from 1.4%.
Real GDP: The ECB upgraded Real GDP for 2021 to 5.0% from 4.6% in its June projections. Whereas projections were downgraded slightly for 2022 to 4.6% from 4.7% and for 2023, the number remains the same at 2.1%.
Data review:
In the second quarter of 2021, GDP increased by 2.2% in the euro area and by 2.1% in the EU compared with the previous quarter, according to an estimate published by Eurostat, the statistical office of the European Union.
The ZEW Indicator of Economic Sentiment for Germany decreased in the September 2021 survey, falling 13.9 points to a new reading of 26.5 points. Since May 2021, the indicator has dropped for the fourth consecutive time, ZEW reported last week.
Looking ahead, Eurozone industrial production will top headlines. Besides, August CPI, industrial production, and retail sales for the US grab the attention.
Eurozone industrial production likely rebounded 0.5% m/m in July after a 1% decline the previous month. A strong release out of Germany will help lift the eurozone aggregate, Moody’s Analytics reported.
Euro crosses:
Past week euro was underperformed 0.6% against USD, 0.35% against GBP and Yen, and outperformed against loonie and Aussie dollar by 0.75% each.
If you’re a euro lover, EURCHF is the better spot to stay and add long dips. Flipside policy divergence could drag EURNZD to 1.64/1.63 levels in the coming weeks.
So far, EURUSD traced out a double top pattern at 1.1900 with supports at 1.1750 and 1.1700. We will trade between 1.1660-1.2010 ahead of next week’s FOMC meeting and the German election.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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