For the past few weeks we’ve been talking about the incredible resilience of the euro. The largest countries in the Eurozone went into lockdown mode at the end of October and today, Germany is talking about extending its partial lockdown for another month. Unlike France and Spain, which have seen their new virus cases fall, Germany and Italy are still struggling to contain their outbreaks. The difference between France and Germany is that in Germany, shops are open, while in France, only essential businesses can operate. Regardless, these lockdowns will take a significant toll on the region’s economy and reinforce the European Central Bank’s need to ease. If they’re lucky, the Eurozone will avoid a double-dip recession, but that’s unlikely.
Yet, instead of weakening, EUR/USD spent the entire week trading above 1.18. In recent weeks, we’ve talked about how the pair should be trading closer to 1.16 instead of 1.18, but the general view that the U.S. is a few weeks behind the Eurozone is one of the main reasons why the euro refuses to fall. With that said, the market may not have accounted for how badly the Eurozone economy was affected and how weak data will be. We’ll get a good look at that next week with Eurozone PMIs, confidence and the German IFO report scheduled for release. If the data is weak enough, and we think it will be, it could cement the top for the euro. Technically, the rally in EUR/USD is losing momentum already, and a move below 1.1820 would open the door for a stronger move to 1.16.
The U.S. has a shortened trading week ahead with the Thanksgiving Day holiday, so trading should be relatively quiet on Thursday and Friday. Aside from these key releases from the Eurozone, UK PMIs, the U.S. Consumer Confidence report and the FOMC minutes are the most important pieces of data on the calendar. USD/JPY trended lower for most of the week and further losses are likely.
The Australian, New Zealand and Canadian dollars should continue to outperform, especially after Friday’s Canadian retail sales report. Consumer spending grew 1.1%, more than five times stronger than expected. Economists predicted a slowdown, but with wholesale sales up and the surge in virus cases happening in October, the September data was bound to be good. South Australia also eased restrictions after the person whose case triggered its lockdown was found to have lied to contract tracers.
UK retail sales beat expectations, with consumer spending rising 1.2% in the month of October, instead of stagnating like economists anticipated. This upside surprise helped sterling extend its gains versus the U.S. dollar and the euro. However, the country releases November PMI numbers next week and they won't be pretty, so beware of losses in the currency.