Next week's price action in EUR could be influenced by the outcome of the German federal elections held on September 22...As we argued in our German elections preview we expect a grand coalition to be seen as more favorable for EUR as it could imply that Germany may become more open to ideas to resolve the Eurozone debt crisis on more sustainable basis like Eurobonds. At the same time, if the incumbent coalition government of CDU/CSU and FDP remains in power, this could be seen as largely neutral to slightly negative for the single currency.
Likely attracting the most attention will be the collection of Fed speakers across the week. Given the degree of misjudgment markets seemingly made into this week’s FOMC, investors will be looking for answers. Such hope may be disappointed however given the speakers (Dudley, Kocherlakota, Lockhart, Pianalto) have given speeches frequently over recent months and likely hit a similar message to Bernanke’s press conference. This much could keep the cyclical headwinds for the dollar in place for now but mainly against higher yielding currencies, while the USD may continue to consolidate vs. JPY.
On the data front, markets will likely focus on the upcoming sentiment indicators out of Germany (ifo) and the Eurozone (PMIs). EUR and other European currencies remain very resilient on the back of steady stream of positive economic surprises seen over recent months. If this continues next week, we think that the single currency together with SEK and NOK could remain resilient against USD and JPY.
Finally, investors will look to the September HSBC flash PMI for China where markets are looking for a nudge higher on the month to 50.9. Pessimism over the state of the Chinese economy has subsided more recently after the pickup in activity in the late summer. Though further improvement may support the risk complex further, we caution against indiscriminate buying. Indeed, we remain cautious on AUD and continue to favor AUDNZD downside.
Valentin Marinov & Josh O’Byrne - Citibank
Read more: http://www.efxnews.com/story/20825/how-next-weeks-eventsdata-will-impact-fx-markets-citi
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