Fundamental Forecast for Euro: Neutral

- The ECB said it would maintain swap operations with the SNB
- German ZEW index indicates investors are more pessimistic on economic outlook, confident in current conditions
- Increase in Euro-zone industrial orders suggests export demand continues to grow

Now that EUR/USD has broken below its 200 SMA – a key technical level for the pair – bearish potential has become even greater, especially when you consider the return of risk aversion. Indeed, in coming weeks, the pair is likely to respond sharply to not only European and US economic indicators, but also any news relating to the financial sector.

Looking to euro-specific data, a number of confidence indicators will be released through the week. There is potential for very mixed results following the past week’s German ZEW report, which showed that investors are feeling more confident in current economic conditions, but are becoming increasingly pessimistic about the outlook as the financial markets show signs of pulling back. On Monday, German’s GfK consumer confidence report is projected to slump to 3.1 from 3.3, which would not bode well for Q1 domestic demand. On Tuesday, the IFO measures of business confidence – business climate, current assessment, and expectations – are all projected to either improve or go unchanged. On Thursday, Euro-zone economic confidence is anticipated to rise to an 18-month high of 92.3 from 91.3.

Additionally, German and Euro-zone measures of inflation are anticipated to show that annual CPI rates rose, but on a monthly basis, they could actually show declines. Finally, the German unemployment change is expected to rise in January for the first time since June, this time by 15,000. Like US non-farm payrolls, this number can be very difficult to predict and thus, tends to have a big “surprise” impact on euro trade, albeit for a short period. Overall though, signs of reemerging job losses would hurt prospects for a continuation of the Euro-zone’s recovery.

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