Fundamental Forecast for Euro: Bearish

- The German trade surplus expanded to 10.6B in September
- German GDP rose for a second straight quarter in Q3
- Has EURUSD formed a double top?

The euro ended the past week marginally higher against the US dollar, but down significantly versus the commodity dollars as Credit Suisse Overnight Index Swap (OIS) rates shifted to price in fewer rate increases. Following the European Central Bank’s last policy decisions, OIS rates had been pricing in 98.5 basis points worth of hikes over the next 12 months, but eased back to pricing in 83.1 basis points worth of increases as of Friday’s close. From a technical perspective, EURUSD remains within an uptrend, but 1.5050 is a very clear barrier and a failure to break above in the near-term may signal a double top for the pair.

Two offsetting forces were coming into play for the euro at the end of the week, as data showed that the Euro-zone’s third quarter recovery wasn’t quite as robust as expected while some hawkish comments were issued by an ECB policy maker. Euro-zone GDP rose by 0.4 percent from the second quarter, missing forecasts for a 0.5 percent increase. Since this was the advanced reading of the index, there was no breakdown available, but the increase was likely the result of a mild recovery in export demand. However, consumption may have remained weak, as services PMI for the region did not rise above 50 – signaling an expansion in business activity – until September. Additionally, ECB Executive Board member Jose Manuel Gonzalez-Paramo said that he couldn’t rule out raising rates while some Euro-zone countries are still in recession, and while such a move would be “less fitting” for those countries, the national governments “will have to understand that.”

In the coming week, only one indicator shows major market-moving potential: Euro-zone CPI. The annual rate of inflation growth is projected to rise to -0.1 percent from -0.3 percent, but according to the ECB’s last policy statement, inflation “is expected to turn positive again in the coming months and to remain at moderately positive rates over the policy-relevant horizon.” A gradual rise in the annual CPI rate would suggest that the markets are correct in their pricing in of future rate increases, and could be supportive of the euro. However, if the data shows that the euro’s appreciation has actually driven down import costs and price pressures in general, the currency could pull back.

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