Fundamental Outlook for Euro: Bearish

- Final reading on 2Q German GDP confirms economy is teetering on recession
- ECB Weber suggests speculation of an impending cut are “premature”
- Euro Zone inflation estimate cools more quickly than expected from a 16 year high

Though the data crossing the European wires were almost consistently bad, price action for the euro was relatively mixed. This reflects the recent valuation model in the currency market of which economy is contracting more quickly than its peers. Considering the euro’s stability, fundamental market participants aren’t yet concerned that the world power has fallen to the bottom of that list…yet. For the week ahead, mere data analysis will be replaced by the universal driver – interest rates. The ECB is scheduled to deliver its decision at 11:45 GMT Thursday. It comes as no surprise that the general market and economist consensus is calling for no change to the benchmark lending rate. However, considering the data that has crossed the wires this past week, there is a good possibility that Trichet will have use different verbiage at the press conference following 45 minutes after the official decision. With growth in Germany already one quarter into a recession, consumer confidence slipping to 5 year lows and inflation for the broader economy cooling more quickly than was expected, any elements that downplay inflation’s recent ‘alert’ status or boosts growth concerns could spark a dramatic shift in rate forecasts, and in turn the euro.

The fundamental scene doesn’t end with the rate decision for the euro. With the market experiencing low liquidity through the open of the week (the US markets will be closed on Monday for Labor Day), the market may be able to leverage a breakout on the data scheduled for the first half of the week. For a final read on inflation before the rate decision, the Euro Zone PPI report is expected to accelerate to a new record 9.1 percent – a lagging figure (July) but a reminder nonetheless that despite the recent pull back in crude, inflation is still stifling. More consistent market movers are seen in activity figures. German retail sales is expected to contract for a second consecutive month in July while the Euro Zone equivalent is predicted to rebound for its June number. Also, not to be ignored, we have the first revision of Euro Zone GDP. With Germany and Italy threatening recessions, it is highly likely the regional figure will hold below water as well.

Antonio Sousa is a Currency Analyst for FXCM.