Fundamental Forecast for Euro: Neutral

- Euro-zone services PMI rose above 50 for the first time since May 2008, signaling an expansion in activity
- Q2 GDP for the region was revised slightly lower to -0.2%, and an annual rate of -2.5%
- European Central Bank leaves rates at 1.00%, signals broadly neutral stance

The euro ended the past week up against currencies like the US dollar and British pound, but ultimately, the European Central Bank’s decidedly neutral stance during their recent policy meeting monthly meeting creates some downside risks for the currency in the near term. This is especially so since ECB President Trichet seems to be somewhat concerned about the appreciation of the euro, as he said noted that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

In the week ahead, event risk will be fairly limited for the euro, though a few releases could spur volatility for the currency. On Tuesday, the German ZEW survey – a gauge of investor confidence – is projected to edge up to 58.8 for the month of October, the highest since April 2006, from 57.7. Such an improvement would be in line with the steady gains we’ve seen in equities in recent months, but at the same time, the consolidation of the DAX below 5,750 through September and early October suggests any change may be minimal.

On Wednesday, the August reading of Euro-zone industrial production is forecasted to rise by 1.2 percent, which would be the first increase in 3 months and the largest rise since January 2008, and seems reasonable in light of similar improvements we saw out of Germany and France.

On Thursday, the final reading of Euro-zone CPI is anticipated to confirm that the annual rate fell to -0.3 percent in September from -0.2 percent. That said, the ECB has said many times in the past that they expect inflation rates to remain negative before returning to positive levels in coming months, so readings in line with expectations shouldn’t have too much of an impact.

Finally, on Friday, the Euro-zone trade balance is projected to narrow to 2.5 billion euros for the month of August, which would likely reflect a drop in exports but run counter to expectations for a rise in industrial output. Nevertheless, we already saw the German trade surplus narrow during the same period, and as the region’s biggest economy, this result tends to serve as a good leading indicator for the Euro-zone.

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