Euro Recovery Odds Seen Rising on Signs of Stabilizing Economy

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(Bloomberg) -- Investors awaiting signs whether the euro is ready to stage a comeback will be closely watching next week’s regional manufacturing report.

The preliminary data, due next Friday, will help investors bet whether Europe is heading for a more robust recovery, or conclude that recent positive signals were short of the mark. The manufacturing PMI is forecast to reveal a stabilizing economy, with Nomura International Plc reporting wider signs of a recovery that could strengthen the common currency into next year.

Euro Recovery Odds Seen Rising on Signs of Stabilizing Economy

The euro is currently hovering near a one-month low at $1.1029, while benchmark German bond yields are edging up again after a huge bond rally in the first eight months of the year. Nomura sees the euro trading at $1.10 by year-end before rising about 5% to $1.16 by the end of December 2020.

“In a recovery the euro tends to outperform,” Nomura strategists including Jordan Rochester said in a note. “The good news is that our broad measure of risk sentiment remains in risk-on territory and leading indicators suggest the slowdown could turn into a recovery.”

To be sure, European bond markets are yet to see a decisive turning point in the economic data and recent moves are being driven by sentiment rather than a definitive trend in fundamentals. The same may be said about the euro, which has largely ignored recent developments, including the news that Germany avoided its first recession in six years.

Bloomberg economists see a brighter outlook for the euro-zone next year, and optimism grew on Tuesday when German investor confidence rose to the highest level in six months. This follows continued positive signs from China, where manufacturing continued to pick up in October with new orders rising at the quickest pace in more than six years.

For further clues about the future in Europe, traders will be tuning in to a speech by European Central Bank President Christine Lagarde next Friday. With markets largely pricing out further easing this year, any dovish signals could encourage bets against the euro. But chances appear low that she will signal any significant deviation from current policy at such an early stage in her tenure. Meanwhile, other members of the governing council have this week signaled the ECB is in no rush to further expand monetary stimulus.

What to Watch

  • Minutes of Mario Draghi’s final meeting as president of the ECB are coming up, and may provide detail of discussions about the composition of asset purchases and any need to adjust the issuer limit
  • Speeches from ECB’s Lagarde and Weidmann in Frankfurt
  • Fed releases minutes from its meeting on Oct. 30; Fed speakers include Mester, Williams and Kashkari
  • In Sweden, Riksbank deputy governors Ohlsson and Jansson will speak about monetary policy

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