Financial market research and analysis

The euro opened the week under pressure as triumphant Catalan separatists requested mandate to leave Spain. Spanish 10-year yields dropped 7% while the yield spread against the Catalan bonds widened on worries that Spain may be marching towards a period of political instability. At the current stage, the impact of Catalan victory is not expected have any additional near term impact.

The single currency opened the week on slippery ground, somewhat influenced by the Spanish vote but gained a bit of green as European traders still consider the upside risk to be the more likely scenario and signalling that there is little to be worried about in respect of the Catalan situation at this stage. Non-commercial traders are feathering their nest by trimming their short positions in euro contracts. The speculative euro short positions declined from 84202 to 81033 contracts on week to September 22nd, and the futures market certainly hides a further upside potential in the euro.

The euro bulls and bears are fighting on a technically electric field. The 1.1150/1.1235 range shelters the 21, 50, 100 and 200-day moving averages. One camp will certainly succumb and the victory may well be in favour of the euro bulls given that demand in euro as funding currency increases and fund managers are currently pumping up their long euro positions.

The major downside risk in euro is the European Central Bank. While the euro is expected to trend higher versus the US dollar aiming a recovery back to 1.1500/1.1765 zone (Fibonacci 50% and 61.8% retracement over the past three quarters), talks of a potential expansion in ECB’s Quantitative Easing program seems to be the only way to halt the advance in the euro complex.

Versus the pound, numerous failures to break above 0.7400 have somewhat discouraged EURGBP bulls at the start of the week. A setback within the 4-week downtrend range (0.7310 / 0.7190) is now envisaged. In the option market, the euro-pound puts take over the calls maturing in one to three months.

The pound is feeling the pinch as traders await a clearer road map from the Fed in order to reorganise thoughts regarding the BoE normalisation. However the divergence between the ECB and the BoE policy outlook is evidently in favour of a stronger pound, the 0.70p is the mid-term target. GBP continues to outperform FX majors, supported by M&A related flow following reports that AB InBev may submit GBP 70bln bid for SAB Miller.