The foreign exchange market has seen unprecedented volatility in the last several weeks, especially affecting the EUR/USD exchange rate. Overnight, the euro fell against the US dollar. This development is particularly noteworthy given the overall trend, with the EUR/USD leading all other G10 currencies lower against the dollar this week. Traders are looking ahead to important economic releases and central bank meetings. Even as a storm of volatility is brewing across the broader markets, analysts are pointing to a neutral short-term outlook EUR/USD.
How trading goes, of course, depends on the key economic data releases we have in the next few days. A US jobs number coming later this week could add to that impact and signal further changes in the dollar’s performance. We think that the ECB meeting tomorrow will probably end up being rather boring. Euro traders, meanwhile, should not look for any strong direction from it. Speculators are covering their shorts ahead of major, important announcements due to be made soon. In sum, market sentiment indicates that EUR/USD shouldn’t break sustainably underneath the 1.16 line.
Mixed Signals for the Euro
The euro’s recent plunge against the dollar serves as a reminder that a tough macroeconomic environment looms for the currency. The EUR/USD exchange rate fell overnight, adding to the feeling of caution among investors. This loss is all the more acute when considering the performance of other G10 currencies, which have been more resilient.
Even though a neutral picture in impetus terms would imply an unambiguous EUR/USD bearish/deliberate above outlook short-term, analysts argue that current dynamics make this impossible. It seems like the main market participants—buyers and sellers alike—are taking a step back to gauge clearer direction from still-to-come economic figures. These signals are very powerful. Yet arguably, they will decide the course of the euro in coming weeks and months.
The promise of an ECB meeting the following day adds yet more drama to the movie. Despite these signs of turbulence, analysts are predicting a very boring meeting, meaning no great dramatic policy change is coming. Failure to go through with the anticipated change could entrench current market incumbents. Accordingly, traders will be looking to the broader economic data for clues as to direction.
Implications for the Hungarian Forint
Looking at Hungary, the outlook for the Hungarian forint (HUF) seems bearish. GDP figures from Hungary are due on Thursday. Analysts predict the figures will come below market expectations, adding further downward pressure on the forint. Traders will be looking to Hungary’s economic metrics. They will be keen to jump on any negative indicators as omens of deterioration to the country’s overall economic health and prosperity.
The potential impact on HUF could have larger implications for regional currencies. A bad GDP report could cause more turmoil. Investors will undoubtedly continue to take a wait-and-see approach as they look forward to Hungary’s future economic changes. The interplay between domestic economic indicators and currency performance will be critical in shaping market sentiment in the coming days.
As traders process all of these changes, they’ll have to account for how outside forces will impact their trading plan. Should Hungary’s upcoming figures for GDP disappoint, investor confidence would likely take a hit. This drop could only add to the pressure on the forint, depressing it even more against its competitors.
North American Currency Dynamics
For North America, market sentiment suggests there are downside risks to the CAD. This bullish outlook on the dollar is a reflection of strong economic pressures facing the dollar. This week’s expected 25 basis point cut by the Federal Open Market Committee (FOMC) adds to this uncertainty. Investors are now guessing what this likely decision would mean. Speculation continues to swirl as traders await greater easing from US monetary authorities. A subsequent cut in December looks almost completely priced in.
Our own forecast for USD/CAD sees it finishing the year around 1.38. Friday’s conservative projection is a continuation of worries about how Canada is doing economically and what outside forces are weighing on us. These 3-month DXY-weighted 25-delta risk reversals have reached their most elevated levels since April. This shows the increasing volatility and uncertainty, and opposing expectations among traders.
It’s notable that the Japanese yen has gained from recent verbal interventions by officials trying to calm the situation, rather than drive down its value. This unique intervention illustrates the point that central banks can and should play an important role in influencing currency markets through direct actions and strategic communications.
At the same time, Australian (AUD) and New Zealand dollars (NZD) are winning support from investors as markets rotate towards China proxies. This particular preference is reflective of larger patterns in global trade and investment policy. Energy traders are chomping at the bit to pour cash into countries with deep economic ties to China.