European FX Outlook: Political factors set to drive the risk aversion in Europe

What you need to know before markets open:

• Political risk factors dominate Thursday with Catalan ultimatum on clarifying independence due at 8:00 GMT and British PM Theresa May trying to break the Brexit talks deadlock at the European summit.
• EUR is exposed to the political risk of Catalonia breaking free from Spain.
• GBP will be in the spotlight with the UK retail sales report due 8:30 GMT and European summit focusing on Brexit talks.

Thursday’ s market moving events

• China’s GDP rose 6.8% y/y in Q3 2017 in line with expectations, but down from 6.9% in first half of the year.
• China’s industrial production rose 6.6% y/y in September, beating the market expectations of 6.2% rise.
• Australian employment rose 19,800 over the month while unemployment fell to 5.5% in September boosting AUD.
• The ultimatum of Madrid to Catalan Prime Minister Carles Puigdemont expires at 8:00 GMT on Thursday to clarify his claims for independence before central government triggers direct control of the regional administration under Article 155 of the Constitution.
• UK retail sales report is due at 8:30 GMT with sales expected to fall -0.1% m/m in September, down from 1.0% m/m increase in August.
• US weekly jobless claims are expected to reach 240K after 243K in the previous week. 
• Philadelphia Fed manufacturing index is expected to decelerate to 22.0 in October.
• Kansas City Fed President Esther George on "The US Economy: Rural and Urban Growth" in Altus, Oklahoma.
• British Prime Minister Theresa May will meet European leaders in European summit trying to break current Brexit talks deadlock with little success expected by Brussels insiders.

Major forex market movers

• See risk on/off hitting the market after Chinese set of data.
• GBP is likely to be under pressure vs US Dollar after retail sales fall more than expected.
• USD/JPY was a mover of the day with the US Dollar jumping up above 113.00 level gaining 0.72% vs yen on Wednesday.

Wednesday’s macro summary

• ECB’s president Mario Draghi opened the ECB conference, in Frankfurt with a speech focusing on structural reforms rather than monetary policy.
• The UK labor market report revealed that the unemployment remained at 42-year low of 4.3% while wages rose 2.2% y/y including bonuses, slightly above market expectations of 2.1% y/y rise.
• The US housing starts rose 1.13 million in September, down from 1.18 million in August while building permits fell to 1.22 million vs 1.27 million prior month.
• Dallas Fed president Robert Kaplan said he is worried about a short-term tax cut that raises federal debt load, because it may harm long-term growth. In terms of the neutral policy rate, he thinks that it is at 2.5% due to a potential decline in long-term GDP growth.
• New York Fed President William Dudley said that the US Dollar is neutral for the US inflation outlook and the US economy has time to enjoy low unemployment and inflation environment.
• US commercial crude oil inventories decreased by 5.7 million barrels from the previous week.