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Euro Not As Strong As The EUR-USD's Trend Suggests
By Jamie Saettele | Published  09/18/2009 | Currency | Unrated
Euro Not As Strong As The EUR-USD's Trend Suggests

Fundamental Forecast for Euro: Neutral

- Investor confidence hits its highest level since April 2006 as growth, equities recover
- Slow global recovery translates into the biggest trade surplus for the Euro Zone in seven years
- Has a push above December’s highs cleared the way for a EURUSD extension rally?

Is the euro the fundamental powerhouse that the EURUSD would suggest or is the euro merely playing the compliment to the rest of the market? If we were to look at the world’s most liquid currency pair alone, we see a six month trend, recent rally and the highest overall level for the exchange rate in nearly a year. However, the easy read on the major is clouded when we look at the crosses. Against the pound, the euro was set in its biggest rally since March (a move that was mirrored in most of those pairs denominated in sterling). Elsewhere, EURJPY was stuck in a contracting range; EURCHF was virtually unchanged in its 100-point range; and the commodity group consolidated within bigger trends. It seems the case that the market is influencing the euro rather than the euro influencing the market. And, while there are fundamental concerns building beneath the surface, this relationship isn’t likely to change much in the coming week.

Few would argue that risk appetite (and its influence in currencies through carry interest) is a primary driver for the market at large; but what does that mean for the euro? To gauge any currency or asset’s response to sentiment, you need to determine where it stands in the scale of risk. High interest rates, strong growth prospects and progressive policy are a few factors that build a positive correlation to a rising demand for yield. Naturally, the opposite considerations count as traits for a safe haven or funding currency. On either side of this spectrum, we have an asset that is sensitive to the underlying fundamental currency. However, the euro fits comfortably in the middle of the range. The benchmark lending rate in the Euro Zone is relatively high; but the outlook for hawkish progress is reserved. Growth is colored not only by the positive turn from Germany and France; but there have also been downgrades for Italy and Spain. Overall, despite the confidence of politicians and some policy officials, the economy is on the same playing field as the US, Japan and many others. Until the ECB turns up the heat on the target rate or financial troubles (like the ability for some Eastern European economies to repay their debt), this will remain the case.

Outside the vagaries of sentiment, there are a few notable economic events on the docket to supply short-term volatility and perhaps a moderate shift on the bearing for growth forecasts. Top event risk is the series of service and manufacturing sector PMI data. While this series covers specifically the business sector of growth, it is inclusive and timely enough to act as a meaningful leader for growth speculation. Being the September round of data (the ‘Advanced’ or first measure), this will round out the forecast for third quarter activity. All of the regional, German and French numbers are expected to produce month-over-month improvement and most are seen offering ‘expansionary’ readings. This would support the central banks and government’s outlook for growth; but it still does not paint a clear picture for a return to a true expansionary trend.

Other indicators like the Euro Zone industrial new orders and German factory inflation gauge threaten little more than a meager shift; but the IFO business sentiment gauge could generate some fundamental interest. Sensitive to economic health, consumer spending, access to credit, export demand, optimism among German firms acts as its own unique report on the general health of the economy. The headline and expectations readings have been most prized recently; but a closer eye should be kept on the difference between expectations and current conditions. The outlook after a financial crisis and steep recession will certainly improve quickly; but actual health in the economy and markets will be more measured. One will have to give way to the other sooner or later.

DailyFX provides forex news on the economic reports and political events that influence the forex market.