(05 OCTOBER 2017)DAILY MARKET BRIEF 3:Catalan political crisis weighs on euro bulls

Benoit Coeuré, a ECB member, will speak on Thursday in a panel in Frankfurt and the accounts of the September ECB meeting will be published today. We believe that the panel’s discussion will be mostly on the size of the potential reduction of the ECB balance sheet starting in January. We continue to consider that markets are way too optimistic regarding this asset purchase reduction. Markets have sent the euro too high at the moment. Yet, the momentum, which is pausing at the moment, will likely be back on ECB meeting expectations as soon as we get closer to the meeting date which will be held the 26th of October.

The Eurodollar is pausing at the moment below 1.18. Catalonian uncertainties have not clearly weighed on the pair price. We nonetheless believe that bulls have been reduced. Catalonia will declare its independence in a matter of days have declared a Catalan leader. Tensions are then likely to increase and political risks will definitely add downside pressures on the single currency. Markets have not priced in yet any deep consequences of this independence.

Volatility is set to increase, a euro sell-off may be triggered by the Catalonian crisis. Yet, one should not forget the high expectations from the ECB.

By Yann Quelenn