Catalan Referendum Pulls Down the EUR, with Private Sector PMIs to Drive the EUR, GBP and USD

Earlier in the Day:

The EUR hit troubled waters in the early part of the day as the markets responded to the Catalan Referendum result on Sunday, which was marred by police clashes and attempts to shut down polling stations.

A shroud of political uncertainty has hit one of the Eurozone’s largest economies, with the Spanish government having pledged to prevent voting, following Spain’s constitutional court ruling that the referendum would be deemed illegal. As a result of the moves by the government to block voting, turnout was down to just over 42%, while it has been reported that as many as 2m of the 2.3m votes cast, voted in favour of independence, which was above the 1.8m votes considered sufficient by Catalan President Puigdemont to declare independence.

The EUR was on the slide in response to the news from Europe, with the markets now looking to see how events unfold as the Catalan President looks to create an independent state before the end of the week. Spain’s Prime Minister Rajoy has struggled since managing to stave off a populist takeover in the last General Election and the latest actions of the government will bring into question whether Rajoy is the right man for the job.

Despite the EUR’s tumble, risk appetite through the Asian session was upbeat following China’s September manufacturing PMI figures released over the weekend, with the ASX200 making solid gains and the Nikkei on the rise off the back of a weaker Yen.

Positive data out of China coupled with a weaker AUD and Yen are certainly positives for both economies, with the RBA interest rate decision tomorrow and the snap General Election called by Prime Minister Abe bringing the pair into focus through the week.

Macroeconomic data released through the morning session was relatively mixed however, with Australia’s September manufacturing index reflecting weaker activity, while Japan’s Tankan manufacturing projections for the 3^rd quarter were largely upbeat, the only disappointment being the outlook for big industry CAPEX, which fell short of estimates and 2^nd quarter numbers.

The Yen eased back 0.29% to ¥112.84 against the Dollar, with the AUD reversing gains at the open, down 0.14% at $0.7823 at the time of writing.

The Day Ahead:

It’s another busy day ahead on the data front. Finalized September manufacturing PMI figures are scheduled for release out of the Eurozone this morning, with Spain and Italy expected to see a pickup in output to support the strong prelim numbers released last week.
While forecasts are positive for the EUR, the numbers are unlikely to pull the EUR back into positive territory, with the markets likely to continue keeping a close eye on Spain and whether Catalan President Puigdemont can actually create an independent Republic that would certainly disrupt the Spanish economic recovery.

We had seen the EUR steady towards the end of the week, following a disappointing German election result the previous weekend and the markets will need to continue to monitor Merkel’s progress in forming a coalition government.

With the EUR under scrutiny, UK manufacturing PMI figures will be of particular interest this morning. BoE Governor Carney has been clear on a likely rate hike in the coming months should economic data continue to support a move. This week’s September private sector PMI numbers, which include today’s manufacturing, together with construction and service sector numbers through the week, will provide the markets with further guidance on what to expect at the next MPC meeting, with solid numbers likely to see a boost for the Pound, which has been under pressure ahead of the European open, down 0.27% at $1.3362 at the time of the report.

While the data will provide the Pound with direction, the Conservative Party Annual Conference, which got under way on Sunday, will also be a factor to consider, with any loss of support for the British Prime Minister likely to weigh on the Pound.

Dollar strength through the early part of the day has certainly prevailed ahead of this afternoon’s finalized Markit survey manufacturing PMI numbers and the market’s preferred ISM survey figures and, if the Chicago PMI released last week is anything to go by, further gains may well be on the cards for the Dollar should the numbers be as impressive, though the markets will need to be cognizant of the disappointing inflation and personal spending figures released on Friday, which continues to support the more dovish members of the FOMC, who remain in search of an elusive pickup in inflation.

At the time of writing, the Dollar Spot Index was up 0.36% at 93.411, supported by the slide in the EUR, which was down 0.40% at $1.1767, with the direction of the Dollar not only hinged on today’s stats but also sentiment towards tax reforms and hopes that Trump will announce a more hawkish FED Chair.