Fundamental Forecast for Euro: Neutral

- Moody’s says it is impressed with Greek’s efforts while Fitch downgrades Ireland
- Has the EURUSD finally reached a point of exhaustion with a double doji pattern signaling a short-term reversal?

If we were to measure the euro’s strength in an absolute world with no reference to its counterparts; the currency’s trajectory and pace would likely be a lot different. However, this is a market; and all is relative. For the second most traded currency in the world, the troubles of the most liquid are a natural booster. For evidence of this dynamic, we see that this past week the euro was able to keep its bullish bearings through Ireland’s downgrade, policy officials’ verbal attempts to curb the rally in exchange rates and a surge in ECB purchases of sovereign debt. Helping to offset all these issues: EURUSD produced an unnaturally consistent, three-week rally to five month highs. When the euro’s troubles are set in contrast to the dollar’s tangible troubles, the shared currency looks robust. Yet, this speculative schadenfreude cannot last forever. Eventually the euro’s troubles will swell or the dollar’s troubles will recede to the point that they reach some level of equilibrium and eventually trade places. Is this the week that the reversal occurs?

From a purely technical standpoint, speculative resolve behind EURUSD may soon reach a point of exhaustion. EURUSD has rallied as much as 1,441 points in the span of approximately four weeks. This is approximately the same distance the pair ran from early June to early August (a two month run) at 1,457 points. Furthermore, the pair is at a meaningful psychological barrier and five-month high at 1.40. And, looking at crosses like EURGBP, EURJPY and EURAUD; there is evidence of early selling pressure. Can we extend this sense of an overbought market to fundamentals? Certainly. EURUSD’s performance to this point has been founded on the speculation of an imminent increase in stimulus by the Fed and a general stabilization in the European financial (a rebalancing of the scales so to speak with the greenback previously standing in as a safe haven and the Euro suffering for sovereign downgrades and evaporating liquidity). That being said, the US central bank has not actually taken meaningful steps towards increasing its bond purchases and the cost of Europe’s recovery (through debt servicing, downgrades, diminished bond demand, etc) continues to grow. What is needed is a shift in sentiment. What will likely start out as an overdue technical correction will evolve into speculative unwinding, financial media attributing the move to some intangible shift in actual fundamentals, investors changing their prejudice towards data (ignoring the bullish and responding to the bearish) and ultimately a self-sustained reversal. Fundamentals are not facts, they are the popular interpretation of events and data.

If instead of dominant trends, we are looking for volatility; there are a number of scheduled events and releases that should be noted. From the docket, the data is actually second tier in nature. The Eurozone CPI reading will be used to gauge the still distant potential of an ECB rate hikes. Industrial production and trade for the region will be important growth measures; but the market has shown little taste for such objective readings. Instead, the ECB’s monthly economic report will carry a little more weight as an overview of the bigger picture of what policy makers deem important to future policy decisions. Speaking of the ECB, the Central Bank President Trichet is scheduled to speak on Monday about the financial system – a prescient topic given Europe’s long-term problems with its recovery / deficit cutting balance set against a rapidly rising currency.

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