Adverse Factors Put EUR at Risk

Three central banks hold rate-setting meeting this week, with Bank of Japan (BoJ) and Bank of Canada‘s meeting on Wednesday, and European Central Bank’s on Thursday. At the same time, the most concerned Bank of Canada is expected to deliver a sooner-than-planed interest-rate-hike message, due to the recently surging energy prices, well-performed economic data and decreasing inflation, further boosting a strong CAD. Whilst, attacked by the pandemic, Japan is faced with rocketing energy prices and chip shortage, but with an inflation rate of only 0.2%. It is reckoned that the BoJ has not been poised for being hawkish. Instead, it is estimated to send a more dovish message in the financial market.

European Central Banks rate-setting meeting scheduled on Thursday is possibly to send the EUR dropping further. Therefore, more attention should be paid to the statement by the bank after the meeting. Affected by the rocketing energy prices and lacking of chips, the recent data released by Germany was all right after a fashion, especially in industry. This Monday saw the Germany Business Expectations in October, falling to 95,4, with forecast value being 96.4 and previous value 97.4. In addition, the Germany Ifo Business Climate Index in October also dropped back to 97.7, with forecast value being 97.9 and previous value 98.9. The EUR went down after the above data was published.

Last Friday witnessed an overall decrease in PMI data by Germany and the euro zone, indicating a slow economic growth in Germany and Europe and even Germany‘s economic stagnation. As the euro zone’s biggest economy, Germany‘s bad economic status will in part encumber the overall economic performance in the zone, which makes it impossible for European Central Bank to pace up the plan to withdraw QE policy and to hike interest rate in the short term. It is estimated that these negative factors are not conducive to the EUR. So it’s not the right time for European Central Bank to discuss tight monetary policies such as the QE in Thursdays rate-setting meeting.

Whats more, there still has not a political party that can constitute a coalition government since the Germany Election started late September, reflecting an uncertain political situation. To make matters worse, Poland bitterly argued with the EU about justice issues. The financial market has already begun to hype the possibility that Poland would announce to exit from the EU following the UK. Under the pressure from the local people, Poland may hold a referendum to decide whether to exit or not. If the referendum takes place as planed, it would not be conducive to the EUR outlook. And the European currencies including the Swiss franc and pound may be encumbered due to a falling EUR. In addition, it is worth noting that the dropping EUR will contribute to a further increase in the US dollar index.