'Many Drops Fill a Bucket': Small Concerns Overwhelm EUR/USD
- No single catalyst for EUR/USD's decline today - minor issues have simply added up over time.
- Euro move not reflecting rising ECB rate cut expectations: odds for a 10-bps cut in December at 17%.
- See the DailyFX economic calendar for the week of October 9 to October 14.
There's no one overarching concern for the Euro at the moment; instead, it appears that a myriad of small issues have cropped up and have started to become too great a burden to bear. This is an echo of our weekly forecast for the Euro, "Euro Not in the Driver’s Seat: Brexit Fears and Fed Hike Speculation Dominate." Today, exogenous influences are very much in control, forcing the Euro out of its two-month consolidation versus the US Dollar.
More weakness in GBP/USD is clearly starting to spillover into the Euro's realm, as markets brace for a period of tumult and uncertainty once the Brexit negotiations start. Concurrently, with five major elections in core European countries next year, the possibility for political discontent to manifest itself in the ballot booth is high. No doubt, this is an existential threat simmering below the surface of the Brexit negotiations for the European Union.
Staying in Europe, has anyone been paying attention to Russia before today? A diplomatic trip by Russian President Vladimir Putin to France was canceled (by Russia/Putin) after French President Francois Hollande suggested Moscow was guilty of war crimes. This break in diplomacy comes a week after Russia deployed nuclear-capable Iskander-M missiles to Kalingrad. With an effective range of 250-300 miles, there is a situation brewing akin to the 1962 Cuban Missile Crisis in Eastern Europe. In response, the UK has moved troops into Poland; NATO is ratcheting up its countermove. These developments are being underreported and warrant immediate attention given their potential geopolitical (stability of EU), economic (energy markets), and humanitarian (lack of coordinated international policy in Syria prolongs the crisis) consequences.
Away from Europe, the winds are blowing in favor of the US Dollar. Fed funds futures markets are now pricing in a 68% chance of a 25-bps rate hike by December, essentially suggesting the market thinks its 'all-but-certain.' With the bond market closed yesterday for the US federal holiday, US Treasury yields gapped open higher today. At the time of writing, the US 10-year Treasury yield was up by about +4-bps, while the German 10-year Bund yield was down by about -2-bps. On balance, the 6-bps shift in interest rate differentials in the US Dollar's favor is helping drive EUR/USD weakness today.
In sum, there really isn't one particular item that's driving down the Euro today; instead, it appears several small issues have culminated into a burden too great for the Euro to bear at present time. Envisioning these small pieces of negativity as aqueous solution: these drips of unfavorable developments, individually, may not appear like a strong enough flow of negativity to displace the Euro; however, provided enough time, many small drops can fill a large bucket; and today, with all of these small issues brimming (the meniscus), the surface tension may have finally broken in the Euro.
--- Written by Christopher Vecchio, Currency Strategist
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