Fundamental Forecast for Euro: Bearish

- The German economy expands at its fastest pace on record in the second quarter
- Spain’s Prime Minister hints at relaxing austerity, Slovakia breaks the unity in stabilizing the region
- EURUSD posts a remarkable reversal; but is this correction destined to develop into a trend?

The Euro finished the week at fresh monthly lows against the US Dollar, briefly breaking below the psychologically significant 1.2700 mark before recovering marginally into Friday’s close. A relatively uneventful week of trading left the EURUSD in a tight range until the very end; a near-2 percent decline in the Japanese Nikkei 225 sparked similar declines in European equity indices and took the EURUSD lower on a broad-based US Dollar advance. The week ahead promises a pickup in economic event risk, and the recent EURUSD downtrend leaves it at clear risk of breaking below key support at 1.27. It will be critical to watch whether economic data will be enough to deep the European currency aloft against its US counterpart.

A mid-week German IFO business confidence report dominates the relatively busy week of regional economic event risk, while earlier European PMI results may likewise translate into shifts in sentiment across EUR. Financial markets have recently honed in on disappointments in US economic data and often punished the US currency accordingly. Yet markets are fickle, and similar signs of weakness out of the Euro Zone could elicit similar declines in the EUR.

It will be important to watch for signs of continued strength out of Purchasing Managers Index (PMI) data out of various Euro Zone member states on Monday, while German IFO business confidence trends are similarly seen as a leading indicator for economic growth. Though the PMI releases are not known for forcing sharp short-term price moves, they are seen as good barometers for underlying industrial trends and as such carry a good deal of weight in forecasts. Given the relative unease across European and global equity market indices, any noteworthy disappointments could force sharp pullbacks.

Euro traders will otherwise monitor any and all surprises out of the US economy in what promises to be an exciting week of price action. The month of August is not known for producing large price moves across major currency pairs, but the past two weeks of price action have made it clear that sharp volatility can occur at a moment’s notice. Thus it will be important to keep an eye out for sudden deterioration in financial market risk sentiment. Given the Euro’s sharp turn lower through the past two weeks of price action, short-term momentum favors continued declines through upcoming trade.

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