Fundamental Outlook for Euro: Bullish

- The European Central Bank cut rates by 50bps to 3.75% as part of a coordinated move with other central banks

- However, the ECB’s statement and comments by the ECB’s Nowotny suggests it was a one-and-done deal

- The G7 statement revealed no formal plans, will the EU meeting on Sunday yield a solution?

The euro plummeted against the greenback to hit the lowest levels in over a year before finally hitting support at the 6/13/07 low of 1.3263. Indeed, fears of a financial market meltdown drove the US dollar higher across the majors as the G7 meeting in Washington failed to yield anything supportive of investor sentiment. In fact, the only news regarding the G7 meeting was generally negative, with Italian Finance Minister Giulio Tremonti refusing to endorse a draft statement, saying that it was “too weak.” Meanwhile, comments by Italian President Silvio Berlusconi saying that they discussed “suspending the markets for the time it takes to rewrite the rules” sent stock markets diving lower. Mr. Berlusconi later rescinded his statement, saying he didn’t mean it, but the reaction of the markets highlights how incredibly important it is for official to issue a strong statement or plan in the near-term.

As a result, the meeting of European Union members on Sunday will be key to where EUR/USD goes next. French President Nicolas Sarkozy's office said the meeting is meant to “to define a joint action plan” among EU members. It will be interesting to see if other countries become involved in this meeting, such as the UK, as UK Chancellor of the Exchequer Alistair Darling proposed during the G7 meeting that nations should guarantee lending between banks, either by turning central banks into clearing houses for the loans or having governments back them. The key gauge of this will be to see how the stock indexes react to any announcement, as indications that the financial markets are stabilizing could trigger a reversal in the moves we saw last week, working in favor of EUR/USD strength.

The other main factors to keep in mind will be the release of Euro-zone economic indicators, including the German ZEW survey and the Euro-zone Consumer Price Index. The ZEW survey is likely to reflect pessimistic sentiment amongst investors given the extent of the credit crisis, and this data could weigh on EUR/USD for at least a short-time. Meanwhile, the September reading of Euro-zone CPI is expected to slip to 3.6 percent from 3.8 percent, but if this actually holds steady or falls less than forecasts, the euro could gain. The odds may be in favor of a more euro-bearish result though, as CPI could actually slip a bit more than anticipated, which would support the case for additional rate cuts by the ECB going forward.

Terri Belkas is a Currency Strategist at FXCM.