Fundamental Forecast for Euro: Bullish

- Second quarter European economic growth beats expectations, Euro strengthens
- Buoyant financial market risk sentiment bolsters Euro versus US Dollar
- Euro correlation to MSCI World Stock Index remains strong, key to trends

Strong fundamental data and buoyant financial market risk sentiment led the Euro higher versus the US Dollar, and short-term momentum favors EURUSD strength into the week ahead. The short-term correlation between the Euro/US Dollar currency pair and the benchmark US S&P 500 currently trades near record-highs, and a 3+ percent weekly rally in the S&P virtually guaranteed that the EURUSD would finish higher. Nowhere was this more evident than following Friday’s US Nonfarm Payrolls report. Despite the positive surprise in the strongly market-moving US economic report, the Euro rallied against the safe-haven USD on a sharp rally in ‘risk’. We expect to see similar price action out of the Euro and broader risk sentiment in the week ahead.

The week ahead promises relatively little in the way of top-tier economic event risk, but a number of lower-tier data releases could force moves on significant surprises. Such events include German Factory Orders and Industrial Production data, the European Central Bank’s Monthly Report, German Consumer Price Index inflation figures, and Euro Zone PMI Services results. None of these events typically produce large swings in the Euro currency, and a similarly empty US economic calendar means that it would take major surprises out of lower-tier releases to force event-based volatility. It will instead be most significant to watch for any and all shifts in financial market risk sentiment—especially as seen through the resurgent US S&P 500.

We had earlier called for continued S&P weakness on generally dour financial market sentiment, but a strong start through the first week of September leaves momentum plainly in favor of further gains. Looking at the Euro itself, Forex Futures and Options positioning suggests that sentiment favors further strength. This is admittedly a significant turn from our previously bearish bias, but the single currency has shown noteworthy resilience and in this author’s opinion stands to gain further through the coming weeks. From a technical standpoint, the EURUSD may encounter significant resistance at the psychologically significant 1.30 mark. Yet a break higher would likely signal that a test of multi-month highs is likely.

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