Week in FX Europe - Bank of Japan and Fed pressure ECB both ways

• ECB Bank Stress Tests results stress EUR
• German Confidence falls again in October
• BOJ and Fed in the driver seat of Global monetary policy

The results of the European Banking Authority (EBA) stress tests were published on Sunday and so began a hard week for the EUR. Twenty four banks failed the stress tests, with Italian banks on the spotlight as nine found themselves on the black list. There is a 25 billion capital hole for the European financial system.

EUR/USD continued to lose ground, as the pair trades in the mid–1.25 range after trading below 1.25 as a reaction to the Bank of Japan stimulus announcement. In the Eurozone, German Retail Sales posted a sharp decline of 3.2%. French Consumer Spending came in at –0.8%.

It’s been a rough week for German releases, as the Eurozone’s largest economy continues to struggle. The Ifo Institute Business Climate survey fell to a six month low. Germany depends on exports to grow and it is now under threat from geopolitical turmoil such as the situation in Ukraine and with monetary policy moves such as the ones announced this week by the Bank of Japan and the U.S. Fed.

On Friday, German Retail Sales were dismal, plunging by 3.5%. This marked the sharpest decline since October 2007. The markets had expected a decline of 0.8%. Consumer Climate and CPI softened in September, although Unemployment Change was better than expected. Meanwhile, Eurozone CPI edged upwards to 0.4%, matching the forecast. Core CPI and the Unemployment Rate remained unchanged, at 0.7% and 11.5% respectively.

The European Central Bank will release its minimum bid rate announcement next week where no change is expected followed by a press conference. ECB President Mario Draghi will continue to struggle as he has no answers for the market questions. He will redirect the attention to the EU governments who need to step up their commitment to growth by allowing sovereign debt to be part of the stimulus menu. Without that, the ECB has its hands tied as there is only so much that can be done. On the other hand it has left the market speculating about other options and even the rumours of corporate bond buying have trigged EUR negative moves.

The Bank of Japan was under pressure as Abenomics was running out of steam and the 2% inflation goal in a two year timeline was getting further away. In a surprise move the BOJ added to its current stimulus and gave the market the signal to take more risk. The flip-side of this action was the U.S. Federal Reserve which announced the end of quantitative easing and although giving no time commitments is on track to raise rates next year. The ECB by comparison stands alone as a Central Bank who needs to act, but it is prevented from doing anything meaningful by the European political quagmire. Both CBs put pressure on the ECB, that hopefully it can help to help unlock the EU’s divisions amongst nations regarding the much needed stimulus.

Next week in Europe

There are two major events during the week. The Bank of England and the European Central Bank will announce their benchmark rate. As with the RBA there are no changes expected as the BOJ seems to once again lead with example on the stimulus front as it did in 2013. The BOE could take a cue from the Fed and begin cutting back on its bond-buying program, but that seems unlikely given the dark clouds that have begun to appear above the UK economy and upcoming elections next year reward prudence over speedy action.

The U.S. Non-farm payrolls will be published on Friday. The biggest economic indicator in the forex market can further validate the Fed’s decision to end its quantitative easing program off the table and build more confidence in the growth of the U.S. economy. This in turn would boost the USD strength versus all pairs. Last month’s figures came in at 248,000 added jobs and while expectations are for a lower number as long as it is above 200,000 it can justify the strong USD position.