Fundamental Forecast for Euro: Bearish

- Euro-zone manufacturing PMI was revised up to a 1-year high
- Euro-zone services PMI continued to signal a contraction in activity, albeit at a slower pace
- The European Central Bank struck a neutral tone, left rates unchanged at 1.00%

The euro was one of the weakest major currencies on Friday, but it has little to do with European data. Instead, the release of US non-farm payrolls triggered a surge in the US dollar, which led EURUSD to break out of a tight range and down roughly 200 points. Looking at things from a macro perspective, the US employment numbers have led the markets to price in a greater probability of rate hikes by the Federal Reserve down the line, while the neutral tone struck by the European Central Bank on Thursday has left the euro dead in the water. That said, while 1.4150 offered support for EURUSD on Friday, more substantial support may not come into play until 1.4080, where we have the 50 SMA and a rising trendline connecting the April and July lows.

In the coming week, as the euro will face very high event risk from the release of Q2 GDP. The advanced reading of Q2 GDP is forecasted to contract for the fifth straight quarter, this time at a rate of -0.5 percent, compared to -2.5 percent in Q1, while the year-over-year rate could fall by a record 5.1 percent. Such data would back up the ECB’s recent claims that the pace of contraction is “clearly slowing,” and if GDP falls less than anticipated, the euro could rally. On the other hand, a worse-than-expected decline in Q2 GDP could weigh on the currency.

There will also be a handful of other indicators released throughout the week. On Wednesday, Euro-zone industrial production is projected to rise slightly for the month of June, but after the German results reflected a small drop, there are downside risks for the broader release. Meanwhile, the European Central Bank’s monthly report is unlikely to expand upon what ECB President Jean-Claude Trichet said in his policy statement last Thursday. Indeed, as far as ECB releases go, their next decision on September 3 will be the major one to watch as they will revise their economic forecasts. Finally, on Friday, Euro-zone CPI growth is projected to remain at -0.6 percent for the month of July from a year earlier, as the ECB does not anticipate that annual inflation rates will turn positive again until “later this year.” Nevertheless, lower than expected results could stir up concerns that deflation is a major risk for the Euro-zone economy.

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