Fundamental Outlook for Euro This Week: Bearish

- Euro Zone retail sales were slightly better than expected, suggesting economy may be stabilizing
- Euro Zone Q1 GDP was revised down to an annualized -4.8% from -4.6%
- ECB keeps rates at 1.00%, but leaves door open to further cuts

The euro ended the week down against the US dollar, but the bulk of the pair’s decline occurred on Friday following the release of better-than-expected US non-farm payroll results. Indeed, EUR/USD plunged about 200 points and closed below trendline and psychological support at 1.4000, suggesting that from a technical perspective, additional declines may be in store for the pair. There is also potential for EUR/USD declines from a fundamental perspective in light of the European Central Bank’s (ECB) recent meeting.

The ECB left rates unchanged at 1 percent, and ECB President Jean-Claude Trichet’s subsequent press conference initially offered some support for the euro, as he called current rates “appropriate” and said that recent data suggest that the Euro-zone recession may have bottomed during the previous two quarters. However, during the Q&A session, Trichet said that rates aren’t necessarily at their lowest level, suggesting there may be room for additional rate cuts. He also went on to say that the ECB will begin their 60 billion euro covered bond purchasing program in July, and will buy bonds directly in the primary and secondary markets. While the “credit easing” program is relatively small compared to those implemented in the UK and US, it is at least a start and creates potential for lower yields.

Looking ahead to next week, the Euro Zone’s economic calendar will look relatively light. Sentix Investor Confidence is anticipated to improve slightly to an 8-month high of -31 for the month of June from -34.3, as European equity markets have steadily climbed higher. Meanwhile, the German Trade Balance and Industrial Production readings for the month of April are likely to reflect the impact of weak export demand from the nation’s trading partners, as the trade surplus may narrow to 9.3B euros from 11.3B euro, while industrial output could shrink an annualized 20.5 percent. The final German CPI figures aren’t anticipated to reflect any revisions, but that would still leave the annualized rate of inflation at zero, signaling deflation potential. Finally, the ECB’s Monthly Report may not shed much more light on the ECB’s policy bias, but traders should still keep an eye out for surprising comments as they could easily shake up the euro upon release.

Jamie Saettele is a Technical Currency Analyst for FXCM.