EUR May Weaken Further as Catalan Crisis Heightens

Talking Points

- EUR/USD trades at a three-month low and may weaken further on the ongoing Spanish political upheaval.

- The pair may also suffer Friday if the first look at US 3Q GDP surprises to the upside.

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EUR/USD has dropped nearly 5 cents since its recent September high of 1.20920 and is likely to probe the downside further as heated talks continue in Spain after Catalonia voted for independence at the start of October. The move lower was given extra momentum Thursday after the European Central Bank delivered a ‘dovish’ monetary policy tightening, indicating that interest rates in the bloc would likely not rise until at least 2019.

And the single currency will see additional volatility, and potential losses, over the near-term as the Spanish government looks poised to strip the Catalan government of its regional powers by invoking article 155. The Spanish government is meeting Friday to vote on measures to seize some of Catalonia’s autonomous powers in a move that will spark further civil unrest. The Catalan parliament will also meet today and may declare independence from Spain as mandated by their vote on October 1.

EUR/USD fell to its lowest level in three months and could fall further as key support levels near.

Chart: EURUSD Daily Timeframe (July 24 - October 27, 2017)

Chart by IG

In addition, a resurgent USD is now weighing on the pair with US bond yields marching ever higher. The interest-rate sensitive 2-year now trades at a nine-year high yield of 1.625%, the 5-year trades at a six-and-a-half year high of 2.07%, while the 10-year benchmark trades at 2.45%, the highest level since March this year.

Ahead this afternoon, the first look at 3Q US GDP may provide some short-term relief if the growth rate falls markedly from a prior 3.1%. DailyFX analyst David Song looks at today’s US release and its potential to extend post-ECB losses here.

We will be covering the US 3Q GDP release live here.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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