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Posted by Joseph Trevisani on Nov 6, 2017 1:35:29 PM

The euro is under pressure from both sides of the trading equation. 

The dollar is fueled by a strengthening U.S. economy reinforced by the widespread expectation of pro-growth tax cuts and a Federal Reserve committed to normalizing rates.

In Europe the ECB's reluctance to aggressively reduce it bond buying despite improving continental economies led to the euro's largest one day drop against the dollar in sixteen months on October 26th.

Friday's U.S. October payrolls report is the latest in a string of impressive statistics that put consumer and business optimism at or near post-recession highs with strong and continuing gains in consumption and business investment. 

Although annual wage increases slipped back to 2.4 percent in October, the low of last two years and the yearly core PCE price index has fallen by one-third since January, from 1.9 percent to 1.3 percent, the furthest it has been from the Fed’s 2 percent target in two years, neither will likely dissuade the Fed from its third 25 basis point hike next month.

In October  the ECB announced its second reduction in its monthly bond purchases, to 30 billion euros from 60 billion euros beginning in January, but extended the length of the program to at least September 2018.

The bank is slowly easing away from its quantitative easing program which began in March 2015 at 60 billion euros a month, increased to 80 billion euros in April 2016 and was reduced to 60 billion euros this past March. 

The ECB took longer to implement quantitative easing due largely to resistance from the German Bundesbank but it has succeeded in driving short-term sovereign interest rates in many EMU counties to historic negative values.

The ECB's caution in ending its rate experiment, the last Federal Reserve QE purchase was just over three years ago in October 2014, may stem from its more difficult economic and political situation.

Unemployment remains high in many EMU countries. In Italy for example, it is 11.1 percent, in France it is 9.5 percent, with youth joblessness double the main rate in many countries. A string of political problems from the exit of the U.K. from the European Union to separatist votes in Catalonia and conservative election victories in Austria, the Czech Republic and Slovakia  and Chancellor Angela Merkel's dismal showing in Germany have no doubt enhanced the natural risk aversion of the Frankfurt central bankers. 

Further downward pressure for the united currency comes from its technical position against the dollar. 

From early January until the first week in September the euro rose 17 percent against the greenback, from 1.0339 to 1.2092. Since that peak the euro has shed but 4 percent, crossing the first minor Fibonacci line at 1.1678 (23.6 percent) on October 26th, the day of the ECB meeting.  The important 38.2 percent line is still two figures from the current level of 1.1613 (1:11 pm ET) at 1.1422, 50 percent is yet further at 1.1216.

With the ECB locked into its current policy pose for another year, and the Fed's rate projections calling for between two and four 0.25 percent increases in 2018, the disparity between the bank policies and between the dollar and the euro can only grow.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters, WorldWideMarkets Alpha Trader


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Average Hourly Earnings (annual)

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Core PCE Price Index

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