Fundamental Forecast for Euro: Bearish

- Euro starts the week on the defensive on Greek Debt Crisis
- Surprise Fed rate hike pushes Euro to fresh yearly low
- Euro/US Dollar Technical Forecast remains firmly bearish

The Euro finished the week almost exactly unchanged against the US Dollar, sustaining a drop to fresh year-to-date lows before bouncing into Friday’s close. Indecisive financial markets made price action especially hard to predict and kept the Euro in a choppy range until the US Federal Reserve surprised markets and raised borrowing costs for banks on Thursday. At that moment the US Dollar surged higher and forced the Euro key support at $1.3600 in mere minutes. Yet traders showed little interest in pushing the US currency to further highs, and a late rally in the US S&P 500 left the EUR/USD firmly above 1.36 through time of writing. Relatively limited economic event risk in the week ahead suggests price action may remain choppy, and volatility expectations have likewise fallen ahead of what traders predict will be muted currency moves. Of course, any and all developments in the ongoing Greek sovereign debt crisis could quite easily force substantive volatility in the Euro Zone currency.

Top foreseeable event risk will come on German IFO Business Climate and Unemployment Change data due Tuesday and Thursday of the upcoming week. The former is likely to show that business sentiment remained relatively unchanged through February—approximately in-line with German ZEW Economic Sentiment survey data. Markets predict that Unemployment Change numbers will nonetheless show the domestic economy shed jobs at the fastest rate since June, 2009 through the same period. Countervailing consensus forecasts underline the level of indecision surrounding economic outlooks and arguably explain the deadlock in financial markets. It may take an especially large surprise in either of these reports to force big moves in European asset classes and the Euro itself. Currencies will otherwise continue to respond to developments in broader financial market risk appetite—especially as it relates to the ongoing Greek debt saga.

The recent meeting of the Euro Zone Economic and Financial Affairs Council stated that the EU would take measures to preserve the financial stability of the single-currency area, but the lack of specific details leaves much undecided. The council stated that Greece would have one month to essentially get its accounts in order before the EU decided on any further action. Rumors that the Greek government may seek to raise funding through a 10-year bond sale has many in fixed income markets especially spooked; a failed auction would only augment fears of Greek insolvency. Thus traders should keep a special eye out for any rhetoric related to said topic and any other developments in Greece. As the worst crisis since the adoption of the Euro, Greek debt problems threaten to derail confidence in the common currency and send it significantly lower against major counterparts. Barring any major developments in said situation, however, the Euro/US Dollar pair may see another relatively uneventful week of trading.

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