Fundamental Forecast for Euro: Neutral

- Euro trades sideways for much of the week’s trade
- Industrial New Orders data for the Euro Zone impresses
- China’s currency appreciation fuels Euro gains

The Euro finished quite nearly unchanged against the US Dollar through an intensely choppy week of price action, but a late-Friday bounce leaves short-term momentum in favor of further EURUSD recovery. China’s announcement that it would allow its currency to fluctuate against the US Dollar instantly sent the Euro higher before Sunday’s open. As markets fully absorbed the substance of China’s moves, however, the US Dollar retraced early losses and a simultaneous tumble in the S&P 500 left the EURUSD lower through later trade.

Various economic data releases should have theoretically produced Euro strength, but in reality the movements in the S&P and other key asset classes continue to be the most important price movers for the Euro/US Dollar pair. A busy week of European economic event risk ahead could force substantive moves in global equity markets, and it will be important to watch moves in the Euro/US Dollar as it nears important price levels.

The infamous US Nonfarm Payrolls report and a number of important European economic data releases should dominate Euro/US Dollar price action in the week ahead. As one of the most market-moving economic data releases in the financial world, US NFP’s could very well break the pattern of directionless Euro price action through recent weeks. Not to be outdone, German Unemployment Change figures could likewise cause volatility across European financial markets and by extension the Euro itself. A great deal of uncertainty surrounds both labor market data releases, and volatility is virtually guaranteed regardless of the results. Whether it will be enough for sustained Euro/US Dollar breakouts is another matter, however; a considerable drop in forex market volatility expectations suggests that the EURUSD could remain in a relatively tight range through the foreseeable future.

The Euro remains well within a significant 7-month downtrend, and it would take a dramatic correction to realistically claim that said trend has ended. Its noteworthy bounce from multi-year lows could subsequently be judged to be short-term consolidation within the context of a much larger down-move, and medium-to-long term momentum favors further declines. Yet recently indecisive price action makes it especially difficult to judge whether this is truly the case, and we may have to wait for a fairly substantial shift in market sentiment before making forecasts with any sort of conviction.

With any luck, upcoming economic data could provide clarification on macroeconomic trends in the world’s largest economies. Traders continue to question whether the US and Europe can continue to see moderate economic growth or whether we could potentially see a “double-dip” economic recession. Recently-dismal US housing data took markets for a spin and considerably dampened enthusiasm for strong domestic growth. The key question will be whether employment data shows continued job gains, and the effect could be substantial on the S&P 500 and the highly-correlated Euro/US Dollar currency pair.

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