Fundamental Forecast for Euro: Bearish

- S&P downgrade of Greek sovereign debt rating threatens euro
- Euro Zone PMI data shows noteworthy expansion, may force ECB’s hand
- Euro/US Dollar very closely linked to gold prices
- Eurobarometer survey suggests labor market hasn’t seen worst yet

The Euro finished the week nearly two percent lower against the resurgent US Dollar, leaving momentum firmly to the downside for the previously high-flying European currency. Bullish Euro Zone economic data was not enough to offset fears of monetary union stability; Standard & Poor’s joined Fitch Ratings and cut Greece’s sovereign debt rating to a single notch above junk status. Combined with news that Austria nationalized its sixth-largest bank, developments in Greece helped sink the euro to fresh lows against the dollar and other currencies. Bullish Manufacturing and Services PMI data had seemingly little effect, while optimistic German IFO Business Confidence numbers barely elicited a positive reaction from the domestic currency. CFTC Commitment of Traders data now shows that Non-Commercial traders have gone net-short the Euro for the first time since May, and the sharp shift in sentiment suggests risk remain to the downside in the weeks ahead.

Three consecutive weeks of declines nonetheless leave the single currency at high risk for a short-term bounce, and a holiday-shortened week of trading may produce especially choppy price action for the Euro/US Dollar pair. Limited economic event risk promises little in the way of direction, and the Euro may take its cues from developments in other markets. Minor exceptions include German GfK consumer Confidence data on the 22nd, while Industrial New Orders results will be released the following day. Neither report has been known to elicit strong reactions from the euro, but relatively illiquid FX market conditions could potentially make for exaggerated moves on second-tier economic data.

Traders should otherwise keep an eye out for market reactions to UK and US Q3 Gross Domestic Product revisions on the 22nd. Global financial markets have generally outperformed through recent months on a bullish wave of economic data. Positive surprises in US GDP figures have encouraged speculators to bet on the end to the broader global recession, and any changes to growth figures could have a similarly dramatic effect on risk sentiment. Though unlikely, material downward revisions to US or UK GDP could sink financial market risk appetite and would likely force further euro losses against the safe-haven US Dollar and Japanese Yen.

Holiday-shortened trading weeks typically bring uneventful price action, but traders should be mindful of exaggerated price moves on pronounced illiquidity. Indeed, trade executions tend to be poor during holiday periods and many would do well to keep position risk light on a potentially unpredictable week of price action.

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