Fundamental Outlook for Euro This Week: Neutral

- Euro Zone inflation registers at 0.0 percent ahead of ECB Rate Decision
- Euro Zone Consumer Confidence bounces, has sentiment truly turned?
- EURUSD defies technical forecasts, where’s the next turning point?

The Euro surged to fresh year-to-date highs against the US dollar, but sharp Greenback declines overshadowed the Euro’s relative underperformance versus the British Pound and other key counterparts. The EUR/GBP exchange rate languished near year-to-date lows despite the surge in the EUR/USD, and the Euro was actually the third-worst performing currency of the G10. Unimpressive European fundamental data certainly did little to bolster the domestic currency’s cause. Negative surprises in German Gross Domestic Product figures and Euro Zone Consumer Price Index data hardly proved constructive ahead of the coming week’s European Central Bank rate decision. Market attention now turns to the flurry of central bank rate announcements in the days ahead. The ECB is widely forecast to leave rates unchanged, but FX traders will pay especially close attention to any noteworthy shifts in rhetoric from the regional central bank.

Market prices and economist forecasts overwhelmingly point to unchanged European interest rates through the coming meeting, but financial markets will listen closely for details on the ECB’s announced €60 billion in covered bond purchases. As central banks around the world have enacted fairly aggressive unconventional measures to boost money supply, many have criticized the ECB as being slow to react to deflationary financial conditions across the Euro area. The €60 billion in bond purchases pales in comparison to the US Federal Reserve’s massive Term Asset-Backed Securities Loan Facility (TALF) program, but it’s at least a start. All the same, the Euro may have actually benefited from the domestic central bank’s relatively muted response to the global financial crisis. Fears of overly-aggressive monetary and fiscal expansion have played a fairly significant part in ongoing US Dollar weakness. If the ECB were to announce similarly aggressive monetary measures (highly unlikely), the Euro could likewise fall against global counterparts.

Euro Zone economic event risk remains otherwise limited, and it will be far more important to watch developments in other economies. Interest rate announcements out of the Bank of England, Reserve Bank of Australia, Bank of Canada, and US Federal Reserve will make for an interesting week in FX Trading markets. Though it is especially difficult to predict what effect these likely varied announcements will have on global economic sentiment, any signs of a turnaround in the recent global equity market rally could have especially noteworthy effects on the US Dollar. The traditionally safe-haven USD has fallen substantially on vast improvements in global risk sentiment, and Friday’s rally in the US S&P 500 left the dollar at the very bottom of its trading range. It will be critical to watch whether such risk-taking trends can be sustained in the face of massive global economic headwinds.

David Rodriguez is a Currency Analyst at FXCM.