Fundamental Outlook for Euro This Week: Bearish

- Improved risk appetite sends Euro soaring versus US Dollar
- Euro gains despite ECB Rate cut, Credit Easing – Why?
- Euro Zone GDP figures promise noteworthy volatility in the Euro
- Forex Trading Sentiment accurately forecasted Euro/US Dollar rallies

An impressive rally in global risky asset classes led the Euro to its highest finish against the US dollar in over a month, and overall momentum suggests further EUR/USD gains are likely. The single currency withstood pressure from a fairly lackluster stream of economic data, breaking a key 200-day Simple Moving Average and closing the week almost exactly at its highs. Indeed, another European Central Bank interest rate cut and announcements of noteworthy credit easing actually led to a rally in the single currency. At first glance such reactions may seem counterintuitive, but we are reminded that the euro’s correlation to risk sentiment remains near record-highs. Instead of forcing euro losses, dovish ECB commentary sparked rallies in European equity indices and a commensurate jump in the EUR/USD.

Euro forecasts will subsequently depend on the general trajectory for risky asset classes, and several key pieces of European economic risk promise noteworthy volatility in domestic financial markets. Domestic equities breathed a sigh of relief as the European Central Bank finally joined the ranks of many global central banks and introduced unorthodox measures to boost money supply. Yet some felt that central bankers fell short of what was needed to counteract massive deflationary pressures in the Euro zone economy. Diverging commentary from ECB Governing Council members tells us that the central bank is far from convinced that further monetary stimulus is truly necessary. Uncertainty surrounding ECB monetary policy will make upcoming inflation data all the more market-moving.

Traders will subsequently watch for surprises out of Tuesday’s German Consumer Price Index inflation readings and the broader Euro zone equivalent due Friday. Consensus survey figures call for a 0.6 percent year-over-year Euro zone inflation rate—a full 1.4 percentage points below official ECB targets of 2.0 percent. Yet the month-to-month trend in prices will arguably prove more important; markets have discounted exceptionally low year-over-year rates but wait to see where future prices are headed. A lower-than-expected inflation result would likely raise the odds of further ECB monetary stimulus and boost domestic stock markets—thereby sending the risk-sensitive Euro/US Dollar higher in the process. Traders will otherwise keep a close eye out for key EZ Gross Domestic Product figures due 09:00 GMT through Friday’s trading.

Medium term Euro momentum favors further gains, but the week ahead promises significant volatility and potential shifts in price action. It remains important to track the S&P 500—especially as it has now rallied in 7 of the past 8 weeks of trade.

David Rodriguez is a Currency Analyst at FXCM.