No trick just treat for Eurozone economic data but euro still spooked

There was nothing spooky about Europe’s third quarter growth rate today, GDP rose to a 2.5% annual rate in Q3, the highest levels since 2011, and the unemployment rate fell to a fresh 2009 low at 8.9%, however this did nothing to help the euro. The market is focusing on the flash estimate of inflation for October, which was weaker than expected with the core rate coming in at 0.9%, the lowest level since May, the headline rate also fell back a touch to 1.4%. The immediate reaction from the market was to send the euro down to fresh daily lows, eroding half of yesterday’s gains. The path of least resistance is lower for the euro right now even withstanding the fact that the Eurozone growth rate is on the coat tails of the US rate.

Spain shrugs off Catalonia crisis to post impressive GDP rate

Eurozone growth is pretty broad-based right now, adding weight to the argument that the Eurozone’s economic recovery is well entrenched. Spain, for all of its political woes related to Catalonia’s bid for independence, posted a 3.1% GDP rate for Q3, while France saw growth beat expectations and reach 2.2% for last quarter. We are still waiting to hear about growth rates in other major nations such as Germany and Italy, if they can post rates around this level then the mood music in Brussels is likely to be good.

ECB getting the best of both worlds, but could Trump disrupt their bliss?

Interestingly (friendly) spirits at the ECB are likely to be high: not only is the growth rate picking up and more people are in employment across the currency bloc, but Draghi’s spell on the markets, which has helped to keep the euro contained, is continuing to work. The question now is how long can this last? We think that Donald Trump could be the one to break Draghi’s spell once and for all as there are some key risks that could threaten recent dollar dominance that are coming up:

1, Tax reform: The Republicans will present Trump’s tax reform bill on Wednesday. Depending on the reception to it, which could ultimately reveal whether it will pass in its current form, this could determine the short-term direction of the dollar. Although this bill is likely to get passed after the House lifted the US federal deficit by $1.5 trillion to accommodate the tax reform, there is still a question of how markets will react to the whopping cost of Trump’s plan as it stands now. Who will buy this $1.5 trillion of fresh US debt now that big foreign buyers such as China and Japan are stepping back? If this causes any bout of concern in the bond market in the coming months then we could see the dollar come under attack in the longer term.

2, The NFP: if we don’t see the anticipated bounce back in payrolls, the market is expecting a whopping 312k reading, then we could see the dollar fall.

3, The next Fed chair: this is the other big theme of the week, we expect Trump to announce who will be chair at some point this week, most likely Thursday or Friday. Right now current FOMC member Jerome Powell, a centrist who favours a cautious approach to hiking rates and shrinking the Fed’s balance sheet, is the market’s favourite with a near 80% majority expecting him to be Trump’s pick. His rival John Taylor is considered too hawkish for Trump’s liking. If Powell is Trump’s chosen one then we would expect the dollar to come off a little due to Powell’s dovish credentials.  If Trump does not choose from this pool of two candidates and makes a surprise announcement, this could also weigh on the dollar at the end of this week.

Although the dollar is in recovery mode after making a bottom in mid-September, the path to a higher dollar has been strewn with a few obstacles, one step forward can sometimes mean one step back, which is why EUR/USD looks well-supported ahead of 1.15 for now.