Fundamental Outlook for Euro This Week: Bearish

- Euro-zone retail PMI edged higher, but held below 50 - signaling contracting business activity – for the 7th straight month
- The ECB reported that loan growth to the private sector slowed, highlighting the extent of the credit crunch in Europe

The euro ended last week consolidating versus the US dollar within a falling wedge formation, which is typically a bullish reversal pattern, but this can only be confirmed by a break above trendline resistance at 1.3978. On the other hand, a decline below trendline and Fibonacci support at 1.3848 would signal potential for a drop toward the next region of support at 1.3575 - 1.3635. How this price action resolves may hinge upon a key indicator due to be released on January 6: CPI. At 5:00 ET, Eurostat estimates for Euro-zone CPI are projected to show that inflation growth eased to a 1.8 percent pace in December from 2.1 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 175 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on January 15, and weigh on the euro. On the other hand, if CPI manages to hold at or above the ECB’s 2 percent target, the currency could gain as the markets assume the central bank will not be as quick to reduce rates. It will be important to watch EUR/GBP as well as EUR/USD, as the former continues to trade near record highs. Near-term resistance for EUR/GBP looms at the December 30 high of 0.9805, but a break above there would suggest that momentum is strong enough to take the pair to parity.

Terri Belkas is a Currency Strategist at FXCM.