Fundamental Forecast for Euro: Bearish

- Euro bounces on financial risk sentiment, German Trade Balance data
- German Industrial Production gains most in 16 years
- View our Monthly Euro/US Dollar Exchange Rate Forecast

Instead, currency traders proved far more sensitive to moves in the US S&P 500 and broader risky asset classes. A relatively busy economic calendar in the week ahead suggests we can expect a pickup in intraday price moves, but low volatility expectations give little scope for a sustained EUR/USD breakout.

Euro traders will keep a close eye on German ZEW figures as well as Euro Zone Industrial Production, and EUR/USD risks seem weighed to the downside ahead of the two potentially contentious reports. Economic confidence data has consistently trended higher after hitting near record-lows, and analysts are calling for further improvement in Germany’s closely-watched ZEW Economic Sentiment survey. Yet the recent downturn in global financial and economic sentiment suggests that future outlook for business conditions may have suffered through the month of July, and we would argue there are noteworthy downside risks to consensus forecasts. Much the same can be said for the simultaneous release of Euro Zone Industrial Production numbers.

Recently published German Industrial Production reports showed that output grew at its fastest in 16 years in the month of May, and similarly robust figures out of France boosted forecasts for upcoming Euro Zone data. Consensus forecasts now call for a noteworthy 1.5 percent month-on-month gain in European industrial output—a welcome ray of sunshine following a gloomy streak across industrial sectors. Substantial declines in consumer demand have meant that IP has fallen by record amounts across the Euro Zone, and highly export-dependent countries such as Germany have felt the pinch. We will need to see upcoming Industrial Production numbers impress to keep hopes of sustained recovery alive. And though Euro Zone Industrial Production figures have not historically produced major EURUSD volatility, traders should be on the lookout for any post-event reactions on the data.

It will otherwise remain important to monitor trends in broader financial markets—especially as it pertains to risky asset classes. The US S&P 500 fell near its lowest levels in over two months and the Euro dropped nearly four percent against the Japanese Yen on flight-to-safety flows. Similar flare-ups in market tensions could once again drive EURJPY price moves, but it is interesting to note that the Euro has held firm against the US Dollar.

Last week we noted that forex options markets pointed to limited Euro/US Dollar volatility expectations and suggested that the EUR/USD would remain stuck in its recent range. Flare-ups in financial market tensions leave 1-week Implied Volatility levels on EUR/USD options marginally higher on the week, but we would still argue that current expectations do not point to a Euro breakout. Given such an environment, we may have to wait until a material shift in financial market sentiment before calling for extended EUR/USD moves. Until then, expect the Euro to remain choppy within a wide trading range against the US Dollar.

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