Fundamental Outlook for Euro This Week: Bearish

- Euro gains as PMI shows signs of “Second Derivative” Growth Improvement
- German IFO Business Confidence survey improves – Euro rallies
- Euro Bear Trend may nonetheless be in its infancy

The Euro finished the week marginally higher against the US Dollar, but it extremely choppy price action makes it difficult to anticipate continued gains through near term trade. Last week we forecasted that a turnaround in the US S&P 500 and other risky asset classes would lead to a similar pullback in the Euro. Yet an early-week decline quickly reversed and led to a similar bounce in the EUR/USD. The US S&P now stands an impressive 30 percent higher from multi-year lows and a mere 4.1 percent down on a year-to-date basis. The impressive recovery in risk appetite has had a noteworthy effect on the Euro, but we continue to question whether such financial market improvement is truly sustainable. Early-week market tumbles emphasize that equities and other key risk barometers remain extremely fragile, and it may be only a matter of time before we see large corrections in the S&P and major world equity indices.

Our outlook for the Euro/US dollar remains bearish, but the true litmus test may come at resistance near the 1.3400 mark. Said level represents an important multi-week high and the 61.8 percent Fibonacci retracement of the 1.3750-1.2880 move—a “line in the sand” for technical traders. Fundamental biases are far harder to establish due to the current economic climate. A busy week of European and US economic event risk may only exacerbate this point, and it will be critically important to watch for shifts in trader sentiment following a key number of data releases.

Likely highlights in the week ahead include German and broader Euro zone Consumer Confidence, CPI Inflation, and especially important Employment results. Recent German Ifo Business survey figures suggest that investor confidence has bottomed and many now expect business conditions to improve through the foreseeable future. This may amount to little, however, if Consumer Confidence does not show a commensurate improvement, and markets will likely respond to any surprises in German Gfk survey results. The very next day’s German Consumer Price Index inflation results could likewise spark volatility in the EUR/USD. Analysts predict that yearly price growth remained at a relatively robust 0.8 percent through April. This stands in stark contrast to a -0.1 percent rate in the United States and perhaps explains why the European Central Bank has thus far kept interest rates well-above their US counterpart. Uncertainty surrounding ECB monetary policy may make for especially large moves on big surprises.

Last but certainly not least, markets will pay close attention to Friday’s Unemployment stats out of Germany and the broader Euro zone. Labor market reports remain very politically important, and any especially noteworthy deterioration in jobless rates could put further pressure on domestic governments and the ECB. Though further fiscal stimulus packages seem unlikely, politicians continue to lean on the ECB—calling for Quantitative Easing measures in order to boost money supply. Any such announcement could easily derail the Euro’s recent bounce.

Jamie Saettele is a Technical Currency Analyst for FXCM.