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In the euro area, we look for a recovery in German factory orders and informative minutes from the ECB September meeting. In particular, we look for hints as to why the council remained silent about its QE program end date and design.
Germany’s price-adjusted new factory orders increased beyond the expectation in August, seasonally adjusted factory orders grew by 1 pct in sequential terms, as compared with consensus expectations of a rise of 0.2 pct.
Meanwhile, the July data was upwardly revised. Factory orders rose 0.3 percent in July as compared with June 2016, as compared with the initial estimate of a rise of 0.2 pct.
The tapering rumours did not travel far. On Tuesday FX market participants had driven up EURUSD levels after rumours made the rounds that the ECB was discussing tapering (i.e. a reduction of its QE purchases).
Yesterday it became clear that this must have been a misinterpretation of the rumours. A central bank ponders to craft theoretical contemplation about possible exit strategies from the currently expansionary monetary policy - without this implying anything about the likelihood of an exit in the foreseeable future.
That meant just a cause for EURUSD’s effort on the verge of fugitive run from the narrow trading range between 1.1123 and 1.1370 (in which EURUSD has been moving since mid-August) failed. That does not bode well for the medium-term outlook on EURUSD volatility.
The EURUSD forecast is unchanged from the profile we’ve maintained for most of this year, showing a gradual uptick each quarter.
Targets are still Q3 1.13, Q4 1.15, Q1 2017 1.17 and Q2 2017 1.18, on a view that any Fed tightening will be too minimal to overwhelms Europe's current account surplus, and that the risk of sharp increase in German Bund yield on any hint of ECB tapering bias the euro higher in coming quarters.
The Q3 2018 target, published for the first time this month in line with our standard practice of forecasting over a rolling 12-mo horizon, is 1.20 on the expectation that focus on ECB tapering will only grow over time, just as US recession risks build.
This week’s ECB meeting confirmed our suspicion that the ECB is quite reluctant to provide additional easing, in turn preserving the risk of an eventual spike in yields that pushes the euro towards 1.20.
