EURUSD: data watching ahead of the Fed

Although the Fed is expected to steal the limelight over the next few days, don’t forget about Europe. There is a plethora of data this week that could be one factor that determines where the EUR ends the year.

Don’t expect a clear signal from Yellen

Some in the market believe that the Fed could err on the hawkish side and will give a clear signal that rates will rise at some point in H1 2015. But what if they don’t? What if the Fed changes the wording to its statement, scrapping the controversial “considerable time” phrase, and replaces it with something vague? The FX market may be preparing for a hawkish Fed, but the Treasury market is more cautious, with 10-year yields close to their lowest level of the year so far.

If the Treasury market is correct and the Fed is less clear-cut than the market expects then the EURUSD downtrend may take a pause as we move into the New Year.

Key data to watch this week includes:

Tuesday:

Eurozone PMI’s (flash readings for December) – the market expects a slight uptick with gains for both France and Germany.

ZEW survey (Dec) – This survey is expected to show a healthy pick-up after recent weakness, suggesting that Europe’s largest economy could have picked up towards the end of the year.

Thursday:

IFO Survey (Dec) – This survey of German industrial confidence is also expected to rise, reversing some recent weakness.

We will be watching these data points closely as they are the most up-to-date, if they are stronger than expected it could fuel a mini-rally in the EUR. Although the Eurozone’s economy remains fairly dour, the market has expected weakness for so long, that the bigger risk for EUR bears is that the data is better than expected.

Fundamentals remain weak:

Don’t get us wrong, the fundamentals for the EUR remain weak, inflation expectations are still extremely low, the Fed is still some way off expanding its balance sheet back to the mid-2012 highs, and interest rate expectations have remained weak, with the bulk of the market expecting the first rate rise to come in Q3 2016 (see figure 1 below).

A helping hand from Russia:

The resilience of the EUR on Monday could also be driven by the weakness in the Ruble, which has collapsed to a fresh record low vs. the USD and EUR. As people are ditching the Russian currency, the whole of the central European region is feeling the pressure, which is leading to some “safe haven” flow into the EUR. Yes, you read that right – the EUR could be gaining a safe haven status on the back of problems in Russia.

The outlook for the EUR:

After a sharp fall since May, the EUR bears could be a bit stretched, especially if we get better than expected Eurozone data this week. Thin liquidity, squaring up before the Christmas holidays, weakness in the Ruble and a mixed message from the Fed could all bode well for the EUR this week. Key levels to watch out for include: 1.2413 – Monday’s low – on the downside, while 1.2500 remains key resistance in the short term. Above here opens the way to: 1.2600 –the high from 19th Nov, then 1.2770 – the high from late October.

Highlights:

• The EUR is looking resilient as we start a new week.

• Some key data releases could be crucial for the direction of the EUR in the coming days.

• The EUR still has many fundamental problems, but it could benefit from a mixed message from the Fed, squaring up before Christmas and safe haven flows from weakness in Russia.

• While the long-term outlook remains bleak for the EUR, in the short term it could be due a recovery.