Fundamental Outlook for Euro: Bearish

- Euro Dives on European Central Bank Interest Rate Cut, but What’s Next from the ECB?
- Yet Euro may be Bottoming Against US Dollar on Overextended Forex Futures Positioning
- View our monthly Euro-US Dollar Exchange Rate Forecast

Aggressive European Central Bank interest rate cuts and astounding job losses out of the US economy had surprisingly little effect on the Euro – US Dollar exchange rate, and indeed the Euro remained effectively unchanged against the dollar through the week’s close. Dealers reported low participation rates and trading volume across the majority of forex pairs—a clear sign that many traders have grown weary following explosive forex market volatility. One has to subsequently wonder what could actually force the Euro/US Dollar out of its 1.2500-1.3000 trading range, and clearly stressed market conditions make it difficult to predict how markets may actually react to important economic data.

Forex market reaction to recent European Central Bank interest rate cuts and dismal US Non Farm Payrolls data was anything but intuitive, and it is difficult to imagine that upcoming German ZEW, Euro Zone GDP, and Euro Zone CPI numbers will elicit straightforward reactions out of the EUR/USD. Markets initially sent the Euro higher following the European Central Bank’s 50 basis point interest rate cut, as many traders had priced in a far-more aggressive 75 basis point or even 100 basis point decrease from the monetary policy authority. Yet traders subsequently punished the Euro on what was perceived to be relatively hawkish commentary from ECB President Jean Claude Trichet. Many expressed concern that the ECB could fall behind the monetary policy accommodation curve and keep rates exceedingly high despite falling inflation—hurting the euro’s prospects against the US Dollar and other major currencies. That previously yield-hungry speculators were disappointed to hear that the ECB may not continue to slash interest rates like their US and British counterparts only emphasizes that market conditions remain far from normal. As such, it is admittedly difficult to predict what may happen through the upcoming week full of economic event risk.

Expectations remain aggressively bearish for all four key pieces of Euro Zone economic data due next week. Economists predict that the German ZEW Economic Sentiment survey will continue to reflect recessionary conditions in the German economy—the previous engine of broader Euro Zone economic growth. Subsequent EZ Industrial Production data will likewise reflect poor conditions for regional producers, and end-of-week GDP and CPI numbers are unlikely to boost confidence in fundamentals for the domestic economies. Absent a truly material positive surprise out of any of these reports, we do not expect a noteworthy improvement in outlook for regional growth and fundamental bias for the Euro. Of course, much the same can be said for the US economy, and the Euro/US Dollar pair could remain in its wide trading range until a bigger shift in fundamental outlook for these global economic titans.

David Rodriguez is a Currency Analyst at FXCM.