Fundamental Forecast for Euro: Neutral

- Euro strengthens despite rising European unemployment
- Our Technical Strategist believes Euro short position attractive
- Euro trend indicator at highest in nearly 2 years, warns of exhaustion

The Euro finished the week sharply higher on continued US Dollar weakness, easily closing above the psychologically significant 1.35 mark and poised to test the next substantial hurdle at 1.40. The single currency did this without any worthwhile support from domestic fundamental developments. In fact, one could argue that recent European fundamental trends should have been enough to slow the significant EURUSD uptrend. Continued concerns over debt growth in Spain, Ireland, and other Euro Zone members did little to stir currency markets. Instead a continued uptrend in the US S&P 500 and other risky asset classes made the risk-sensitive Euro the top-performing G10 currency to round out the week’s trade.

Markets now turn their attention to a busy week of economic event risk out of the Euro Zone and US economy, and substantial USD declines leave clear risk for short-term corrections across Greenback pairs. The infamous US Nonfarm Payrolls report and the usual slew of early-month economic data should dominate EURUSD trading in the days ahead. Yet traders should likewise keep an eye on several key Euro Zone releases. Though region-wide Producer Price Index, Purchasing Managers Index, and Retail Sales numbers don’t often move markets, consistent disappointments or positive surprises could set the tone for EUR price action.

Heavily one-sided EURUSD-bullish sentiment warns that a correction may be near, and we would argue that risks remain to the downside ahead of key economic reports. Non-Commercial futures positioning and FX Options sentiment show that traders remain very much net-short and bearish the US Dollar. Though sentiment can obviously remain extreme for extended periods of time, any near-term USD reversal could invite a pronounced wave of short-covering and force significant EURUSD losses. We cannot responsibly advocate selling the EURUSD into such strength. Yet any signs of price reversal could present an attractive short opportunity. The busy week of economic event risk could easily set the tone for the rest of October, and it is particularly worth noting that currency highs and lows for the month are most often established in the first and last week of trading.

DailyFX provides forex news on the economic reports and political events that influence the forex market.