The Euro’s rebound could continue as 'short covering' gathers pace, French fiscal problems

Matthew Ryan, CFA Ebury

The common currency recovered modestly, posting its first weekly gain in over a month and its biggest daily rise in two months on Thursday. The euro was a clear beneficiary of the dollar’s pullback, since speculative positioning against it is the most extreme in years. Short covering could extend this bounce even without any good news from Paris.

The underlying problems have not gone away: French fiscal consolidation remains unlikely before next year’s presidential election, and the ECB seems reluctant to tighten further. The widening rioting and protests in France could also begin to creep into stocks, bonds and the euro.

Friday’s flash PMIs are the only major release before next week’s European Central Bank meeting.

Economists are expecting a mild softening in activity, though even a strong report here will not be enough to persuade the Governing Council to raise rates this month. Focus will instead be on Lagarde’s comments on the situation in France and her language pertaining to the likelihood of a December hike.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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