EURUSD Holds Below 1.1100 – Waiting for Germany to Act

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Market Drivers November 6, 2019
EZ PMIs improve
New Zealand labor data misses
Nikkei 0.22% Dax 0.15%
UST 10Y 1.84%
Oil $56/bbl
Gold $1487/oz
BTCUSD $9390

Europe and Asia:
EUR PMI 50.6 vs. 50.2
EUR Retail Sales 3.1% vs. 2.5%

North America:
No Data

FX markets were very quiet at the midpoint of the week, with majors hugging narrow ranges amidst very little economic or headline newsflow.

The euro was slightly better bid when the final PMI numbers for the EZ confirmed that economic activity stabilized in the region. The Markit final EZ PMI came in at 50.6 vs. 50.2 with German data showing a slight improvement in both manufacturing and services.

According to Markit, “The IHS Markit Eurozone PMI® Composite Output Index improved during October but remained close to the crucial 50.0 no-change mark. The index recorded 50.6, up from 50.1 in September and slightly better than the earlier flash reading of 50.2, but still signaling a rate of growth that was amongst the weakest seen in the past six-and-a-half years. There remained a divergence between the manufacturing and service sectors during October. Whereas manufacturing firms recorded a ninth successive month of declining production, service sector companies indicated further growth, albeit at the second-weakest rate since January. “

The euro which lost more than 50 pips in yesterday’s trade recovered somewhat but remained under the 1.1100 figure. The pair continues to consolidate near the top of its recent range, but clearly, the market is looking for some sort of a fiscal catalyst to help the pair break out of its low volatility trade. Although hopes are high that the new ECB President Christine Lagarde will try to push the Germans towards a more expansionary policy, for now, there is no evidence that Germans authorities are willing to move in that direction.

One positive development is that German authorities are finally willing to consider a European banking union which would guarantee savings region-wide. Olaf Scholz, Germany finance minister said that Europe’s global role would be undermined if it failed to complete the integration of the eurozone’s financial sector.

The Germans are clearly rattled by Brexit and are beginning to understand that if they want to benefit from the common currency for another 20 years they will need to offer benefits to less fiscally stable members of the union to remain within the block. Furthermore, the need for integration and capital accumulation will become even greater as London spins out of the union and becomes a competitive threat.

For now, these proposals are just ideas on the table, but if Germans decide to move actively in that direction, the impact on the euro would be positive.

Boris Schlossberg
Managing Director

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