Big Day for the Euro with ECB Lagarde and PMIs

Friday will be a big day for the euro. There's a speech by ECB President Christine Lagarde and November PMIs. Since Lagarde became the President of the central bank, she has not made any direct comments on monetary policy. However we know from prior talks that the ECB's new leader is worried about the threat of nationalism along with the danger of global recession and like her predecessor feels that fiscal stimulus is absolutely necessary to sustain the region's economy. The key question is whether she feels the need for more monetary stimulus. So far, she hasn't provided much insight into her views and could choose to remain ambiguous until the next central bank meeting in December. However if she uses tomorrow's speech as an opportunity to clarify her position on easing, we'll see a big response in the euro. A dovish outlook could drive EUR/USD to 1.10, especially if it is supported by weaker PMIs. A more optimistic bias on the other hand will take EUR/USD to a 2 week high above 1.11. Although the euro traded lower today, Germany's better than expected GDP numbers has economists and investors looking for stronger manufacturing and service sector activity. If Lagarde says nothing meaningful, EUR/USD will take its direction from PMIs - either way, we expect a breakout day for the euro.

Meanwhile the Canadian dollar recovered nearly all of yesterday's losses on the back of comments from Bank of Canada Governor Poloz. He feels that monetary conditions are about right, the Canadian economy in a good place and there's a glimmer of response to global easing, which suggests that despite softer data, rate cuts is not on the radar this year for the central bank. They feel that policy today is quite stimulative but they will watch financial stability and confidence closely. Retail sales are scheduled for release tomorrow and if spending beats expectations USD/CAD could slip to 1.32. In contrast, the Australian and New Zealand dollars weakened today as a trade deal between the US and China remains elusive. Credit card spending in New Zealand also fell at a faster pace in October.

There have been many trade related headlines over the last 24 hours but the stagnant price action in USD/JPY tells the real story. China invited US trade negotiators for further talks and is striving to reach a "Phase 1" deal but the US has the upper hand with investors doubtful on any real progress. After passing the House, the Hong Kong Human Rights and Democracy Act has been sent to President Trump. China has called on the President to veto the bill but with unanimous Senate and House support, its highly unlikely that he will do so. They have threatened forceful measures if the bill is signed so expect to tensions to escalate when that happens.

The reason why we haven't seen any big moves in USD/JPY is because the possibility of risk aversion is offset by better than expected data that validates the central bank's less dovish bias. The Philadelphia Fed index rebounded in the month of November, a sign that the manufacturing sector may not be doing as terribly as investors may have feared.