Fundamental Outlook for Euro This Week: Bearish

- ECB cuts rates in line with expectations by 50bps to 2.00%
- ECB President Trichet suggests neutral stance in February, possible rate cut in March
- Euro-zone trade deficit widens as exports plunge by the most in 8 years

The euro ended the week mixed across the majors, as the currency slipped against the US dollar, Japanese yen, and Swiss franc but rose versus the British pound and commodity dollars. Since risk aversion was one of the more predominant drivers of price action from Monday through Thursday, the moves suggest that the euro ranks more neutral currency, but in the same class the traditional carry trades. Meanwhile, it is important to note that despite the European Central Bank’s rate cut on Thursday to 2.00 percent, ECB President Jean-Clause Trichet’s indications that the central bank would leave rates steady in February provides at least a short-term bullish bias for the pair, so long as risk appetite improves. Meanwhile, hourly charts of EUR/USD show that the pair has held below trendline resistance since falling from its December highs, but it will be very important to watch where price stands relative to the trendline at 1.3400, as a break higher would suggest additional gains are to come.

Looking ahead to the next week, event risk will be relatively low but there are still a handful of indicators worth watching. On January 20, the German ZEW survey of investor sentiment is forecasted to show a slight improvement in opinion on the economic outlook, but a continued deterioration in confidence in the current situation. This is similar to what we saw with the US Reuters/University of Michigan consumer confidence index, which reflected a rise in the economic outlook as the government is likely to come to agreement on a fiscal stimulus plan amounting to $825 billion within weeks. On January 22, the European Central Bank’s Monthly Report is likely to highlight the bleak outlook for the economy and expectations for a decline in inflation pressures in the near-term, all of which created bearish potential for the euro. Finally, on January 23, the Purchasing Managers’ Index (PMI) for the Euro-zone’s services and manufacturing sectors are forecasted to reflect a contraction in business activity for the eighth straight month in January, while the composite index is anticipated to the worst level since recordkeeping began in 2005, highlighting the extent of the recession plaguing the region.

Jamie Saettele is a Technical Currency Analyst for FXCM.