Fundamental Outlook for Euro: Bearish

- US Dollar is Safe Haven of Choice, Rallies against Euro Despite Dismal US Data
- Forex Positioning Proves Prescient in Predicting Euro Recovery, but What’s Next?
- View our monthly Euro-US Dollar Exchange Rate Forecast

Euro forecasts against the US Dollar took a turn for the worse on the week, as generally dismal European economic data and further losses in the US Dow Jones Industrials Average led to similar Euro/US Dollar weakness. Official confirmation that the German economy entered a technical recession through the third quarter suggested that the broader Euro Zone finds itself in a similarly weak position—forcing further deterioration in euro fundamental forecasts. Whether or not the Euro may recover against the stubbornly resurgent US Dollar will largely depend on whether global financial market conditions will improve through upcoming trade. The Euro and US Dollar find themselves inextricably linked to broader developments in risky asset classes.

Recent price swings in the Euro/US Dollar exchange rate have been almost purely a function of price action in global equity indices, and we expect that this will continue to be the case in the week ahead. Indeed, forex market reaction to historically market moving economic data has been anything but intuitive; currencies move according to equity market reactions to event risk. It is very difficult to predict how stocks may react to upcoming economic data, and overall bearish momentum suggests we can expect to see the Dow Jones and other major indices drop further through subsequent trade. Further equity market losses could easily lead to further losses in the Euro/US Dollar pair—leaving an overall bearish forecast for the Euro until we see sustained improvement in global risk sentiment.

The Euro may likewise react to any developments out of the much-anticipated G20 meeting over the weekend. Though markets are somewhat unsure of what to expect from the global economic summit, some alarmist forecasters have gone as far to suggest that global leaders could reinstate the Gold standard for currencies for the first time since 1971. Such suggestions seem outlandish to say the least, but we must nonetheless watch for key shifts in global economic policy following the meeting—especially as it relates to exchange rates. We will listen for noteworthy rhetoric from global leaders and take cues from equity market reactions to guide expectations for the Euro/US dollar price action.

Jamie Saettele is a Technical Currency Analyst for FXCM.