Fundamental Outlook for Euro: Bearish

- Euro hits record-highs against British Pound
- Hawkish European Central Bank rhetoric sends euro through resistance against US Dollar
- Extreme sentiment accurately forecasts euro turn versus US Dollar

All eyes will turn to the US Federal Reserve, as the Fed’s Open Market Committee will release its highly-anticipated interest rate decision late Tuesday. The euro’s fate will subsequently depend on whether markets will continue to punish the US currency for clearly bearish economic fundamentals. Markets previously ignored dismal US economic data and used the domestic currency as a safe-haven from financial market turmoil—punishing the euro in the process. Yet early signs show that such a trend may have come to an end, and it will be critical to watch Euro/US Dollar price action through the FOMC rate announcement.

The European economic calendar may likewise spark noteworthy volatility in the EUR/USD; Euro Zone Consumer Price Index results could potentially reshape forecasts for the future of European Central Bank interest rate policy. Analysts predict that EZ CPI fell to 2.1 percent on a year-over-year basis through November—almost exactly in-line with the ECB’s 2.0 percent target. The key question for monetary policy officials will be whether prices are falling fast enough to warrant further interest rate cuts. Already we hear some ECB officials cautioning against dropping rates below record-lows of 2.0 percent, and such restraint could further take hold on a CPI surprise. The week ahead will likely spark great volatility in the Euro/US Dollar pair, and it will be important to keep track of how the pair reacts to various pieces of highly-anticipated event risk.

David Rodriguez is a Currency Analyst at FXCM.