Tomorrow we have a series of important data points coming out of the euro area. The most important ones are Employment Change and the final reading of Q2 GDP. The data is likely to affirm expectations for the ECB to start easing during its next meeting.
The euro has been seeing quite a bit of volatility over the last couple of days, primarily driven by geopolitical events. Investors in the eurozone are a bit wary during this period as major institutions transition to new leadership.
The upcoming meeting will be the last for current ECB Chairman Mario Draghi. His successor will be former IMF Chief Christine Lagarde. The European Commission Presidency will transition later in the year.
On the country level, Brexit dominates the news. However, Italy is in the process of forming a new government led by the 5-Star Movement and center-left Democratic Party. Spain hasn’t managed to form a government in months. In fact, most analysts see the country going to general elections again. All these factors can keep investors nervous, besides the major data releases.
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What We Are Expecting
We could see the most volatility in the euro pairs tomorrow immediately following the simultaneous release of two major data points: the Employment Change and GDP. The former is likely to get the most attention from the market unless there is a significant change in the growth of the economy.
For Q2 GDP, the consensus of expectations is to affirm the Prelim numbers: quarterly growth of just 0.2% implying an annualized rate of 1.1%. A disappointment of just two decimals on the quarterly figure could be quite significant. This is because that would put the euro area at the risk of a technical recession.
The GDP data is coming out just before US Non-Farm Payrolls, which generally gets the market’s attention. Investors are likely to be more hesitant to take positions ahead of the major event. So, we might end up seeing less volatility in response to the data releases.
The primary focus for driving the euro now are the expectations of a resolution to Brexit, and the ECB’s meeting next week. An analyst report mentioned that there were serious considerations to restart QE, with a planned €20B in monthly asset purchases. The idea is that this would support equity markets, which have been depressed since the end of unconventional measures, and weaken the currency.
It’s Not a Done Deal
The last meeting to be presided by Draghi, however, might simply leave everything on hold for another month so the new leadership can take over with a “clean slate”. While, in general, euro area indicators are unsatisfactory, they aren’t significantly worse than they were last month, when the ECB decided to remain on hold.
Lagarde’s confirmation testimony before the EU Parliament drove the markets, particularly when she mentioned that she’d heed concerns about the effects of monetary policy. And several central banks have been expressing worries about an asset bubble. So would the ECB under Largarde be more hawkish? That seems to be a possibility some investors are considering.