HomeContributorsFundamental AnalysisEuro Starts Week Lower After Catalonian Chaos

Euro Starts Week Lower After Catalonian Chaos

The euro has lost ground in the Monday session. Currently, EUR/USD is trading at 1.1734, down 0.69% on the day. On the release front, German Final Manufacturing PMI improved to 60.6, matching the forecast. In the Eurozone, Final Manufacturing PMI improved to 58.1, just shy of the estimate of 58.2 points. In the US, the focus is also on manufacturing data, led by ISM Manufacturing PMI, which is expected to slow to 57.9 points.

The weekend referendum in Catalonia, one of the richest regions in Spain, descended into street battles and widespread violence between voters and police. The national government banned the referendum, and police used tear gas and rubber bullets in against defiant voters, causing hundreds of casualties. Catalonian officials claimed that 90 percent of voters had voted for independence, setting up a constitutional crisis with Madrid. Although, the drama in Spain is not expected to have a serious impact on the eurozone nervous investors reacted to the news on Monday by selling their euros in favor of the dollar and Swiss franc.

The eurozone economy continues to hum in 2017, and the manufacturing sector has rebounded, thanks to a stronger global economy which continues to show strong demand for European products. German and Eurozone Final Manufacturing PMIs both improved in September, with the German indicator recording its strongest reading since April 2011. The labor market also has been improving. The eurozone unemployment rate remained at 9.1%, just below the estimate of 9.0%. Better economic conditions have led to louder calls for the ECB to tighten its monetary policy, particularly from Germany, where officials feel that that the robust economy needs tighter policy. However, the ECB must take into account those member countries that are lagging behind Germany, and ECB President Mario Draghi reiterated last week that the ECB had not made any plans to taper its asset purchase program.

The US dollar gained some ground last week from an unexpected source – President Donald Trump. Trump has all but given up on his health care proposal, as the plan lacks enough support from Republican lawmakers. Next on the Trump Express is tax reform, which was a key campaign plank. Last week, Trump proposed a major overhaul of the US tax code, which includes reducing the corporate tax rate from 35 percent to 20 percent, as well as a 25 percent tax rate for small businesses, such as partnerships. Like other Trump proposals, the tax plan was sketchy on details, including how the tax plan would be paid for. With Democrats and some Republicans wary of Trump’s tax agenda, it’s likely his that tax reform proposal will face a stiff battle in Congress. Still, the markets like the idea of lower taxes, and the US dollar posted back-to-back weekly gains.

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