- The key risk event for traders this week will be the meeting of monetary policymakers at Bank of England, Bank of Japan, and Federal Reserve. Their decisions will impact the direction of currency and other markets in the short-term.
- Next Sunday's German Federal Election is important, even though it may take months to form a coalition government.
DOWNSIDE RISK for EURO PRICE, GERMAN ELECTION NEARS
Like most markets, EUR/USD will be influenced by this week's monetary policy decisions by the Bank of Japan and the Bank of England. Traders in EUR/ US and Euro crosses should look at the opinion polls before Sunday's German Federal Election.
There won't be a clear winner. No party will win the majority of votes. A coalition may take up to six months to form. Chancellor Angela Merkel will continue to serve as a caretaker during that time. There is nothing to move the markets.
The polls are crucial because the Social Democratic Party (center-left) led the charge with 25.4% (14 day rolling average), ahead Merkel's conservative Christian Democratic Union, (CDU), and its sister party, the Christian Social Union(CSU) with 21.6%. They were followed by the Greens (16.1%), Liberal Free Democratic Party (11.5%), the far-right Alternative for Germany (11.3%), and socialist The Left (6.3%).
Merkel's CDU/CSU may be losing ground as she decided to resign and is being replaced by Armin Laschet, who is less popular. It is fiscally more hawkish than the SPD, which is led by Olaf Scholz (more popular), who is generally in favor of greater fiscal stimulus and thus more bearish on the Euro.
There is a good chance that the CDU/CSU could still be part the coalition that will eventually be formed. If talks move forward, it is possible that a coalition could form without them. That could make matters worse for the Euro and the DAX Bunds. There are two options: a so-called Red-Red-Green combination of The Left, the Greens, and the SPD or a Traffic Light combination of the SPD and the FDP.
WEEK Ahead: CONSUMER CONFIDENCE, PMIS AND IFO INDEX
The week ahead is busy, not only for political data but also for economic data. Economists expect the flash Eurozone consumer confidence indicator for September to drop to -5.6, from -5.3. Next day, the Eurozone's composite manufacturing, services, and composite PMIs will be released. Many of these are expected to be lower than August. The September Ifo business climate index (Germany) will be released on Friday. It is expected that it will drop to 98.5, from 99.4.
These numbers will reinforce the belief that the Eurozone's monetary policy will remain extremely loose for the foreseeable future, which is a bearish indicator for the Euro. As Winter draws near, it is important to note that European energy prices have risen, with prices for carbon, power, and natural gas all rising due to supply shortages.