Fundamental Outlook for Euro: Bearish

- Euro remains largely Rangebound despite ECB rate cut predictions
- EU officials aim for coordinated financial bailouts – Euro remains indifferent
- Euro Zone GDP falls by most since 1995

The Euro finished marginally lower against the US Dollar to end the week’s trade, sticking to its fairly well-defined range despite continued tests of established lows. It seems that traders are unwilling to push the Euro/US Dollar below last week’s trough near the 1.2700 mark despite clear downward pressure on risky asset classes. The Euro’s correlation to the US S&P 500 and other risk barometers has literally never been stronger, and we expect that the currency will continue to follow the trajectory of broader financial sentiment. The euro’s resilience to further drops gives us a marginally bullish short-term trading bias.

The upcoming week will bring an important string of forward-looking economic data and paint a much clearer picture on the relative health of Euro Zone economic fundamentals. A German ZEW Economic Sentiment report will be the first key event on the ledger—likely setting the tone for subsequent releases. Analysts predict that business sentiment remains dour, but forecasts nonetheless call for marginal improvement in the forward-looking economic survey. Many research desks claim that stabilization in the rate of economic deterioration may be enough to signal that risky asset classes will turn—implying that the euro could move higher as a result. Though we don’t necessarily subscribe to this line of thought, it will be important to watch for positive surprises in German ZEW data.

Friday’s Purchasing Manager Index results will likewise shed light on the rate of deterioration in the broader Euro Zone and could potentially force moves in euro pairs. The economic release has not been especially market moving, but we feel that any extra bit of information has become all that more significant during times of extreme uncertainty. Consensus forecasts currently call for modest improvements in Euro Zone Manufacturing and Services conditions. Yet both PMI indices are expected to remain below the neutral 50 mark—implying that both sectors remain mired in recession. It will take an especially large positive surprise to elicit a noteworthy improvement in European economic sentiment and—by extension—the euro itself. Otherwise, it remains critical to watch broader financial market risk sentiment.

David Rodriguez is a Currency Analyst at FXCM.