The euro remains under pressure in the Friday session, after dropping sharply on Thursday. Currently, EUR/USD is trading at 1.1628, down 0.19% on the day. On the release front, the sole eurozone event is German Import Prices, which posted a gain of 0.9%. This beat the estimate of 0.5%, and marked the first gain since February. The US will release Advance GDP, which is expected to gain 2.5%. The other major indicator is UoM Consumer Sentiment, with the indicator forecast to jump to 100.7 points.
EUR/USD suffered its largest daily loss of the year after ECB head Mario Draghi said that the Bank’s bond-buying program (QE) would remain open-ended. As expected, the ECB finally pressed the trigger and chopped QE from EUR 60 billion to 30 billion/mth. The ECB extended the program, which was due to terminate in December, to September 2018. However, many investors were hoping that the ECB would not only taper the bond-buying scheme, but would also announce a date when the program would end. ECB President Mario Draghi has given himself plenty of wiggle room, as he can simply extend QE beyond next September. The ECB maintained interest rates at a flat 0.00%, and Draghi provided no hints about the timing of future rate hikes. The ECB appears in no rush to tinker with rate policy, and we’re unlikely to see any rate increases until QE is completed. The euro responded with losses of 1.4%, and is currently trading at its lowest level since late July.
It’s crunch day in Spain, as the Senate will convene later on Friday and is expected to authorize the central government to invoke Article 155 of Spain’s constitution and apply direct rule over Catalonia. What steps will Madrid take? It could dismiss the Catalan government and parliament and take control of the regional police and radio and television stations. This drastic clause has never been invoked, and it remains unclear what lies ahead. How will the Catalan parliament respond? On Thursday, the Catalan vice-president warned that if Madrid imposed direct rule, the Catalan government would have no choice but to declare independence. So far, the crisis has not affected the euro, and Caixabank, the third largest bank in the country, does not expect the Catalonia issue to affect Spain’s GDP, which the bank projects will expand 2.7 percent in 2018. Still, the crisis worsens and Catalans respond with civil disobedience, investors could get nervous and dump their euros for safe-haven assets.
