Fundamental Forecast for Euro: Neutral

Three months ago, the euro was in charge of its own future; and the most prolific fundamental trends were sourced from the stability of the European markets. How things have changed. Despite long-term concerns about the financial and economic balance of the regional economy, investors have decided to turn their attention to considerations that are more immediate. Speculation surrounding the stimulus efforts to be taken by the Federal Reserve and the bearing on underlying risk appetite trends has made the dollar the center of attention. And, just as surely as the greenback played the euro’s counterpart during the Greek/Spain/Portugal concerns; the shared currency now acts as the counterbalance to the dollar’s meaningful swings. However, that is not to say that Europe’s fundamentals no longer matter. They certainly do as the current fundamental fads will eventually pass and expose those developments that have evolved in the meantime. Yet, as long as traders are absorbed in the dollar’s future and the volatility it produces, expect to benchmark your euro forecasts.

In the coming week, there will likely be a shift in speculative interests. The global trend towards stimulus will offer a consistent drone; but its ability to feed speculation and devalue those currencies that happen to be flooded by the policy expansion will be significantly diminished. The two greatest sources of interest on this point are the US and UK. The Federal Reserve is heavily expected to vote on a second stimulus package. That being said, the market has already accounted for this inevitability and sold the dollar accordingly. For the UK, the government slashed spending in its budget and Chancellor Osbourne called on the BoE to fill in the gap; but rate speculation seems balanced for the near future. What’s more, we have a Fed and BoE rate decision scheduled for the following week – creating a ‘quiet before the storm’ scenario. What does all this mean for the euro? As other major financial centers turn dovish, the ECB and its neutral stance are considered a defacto hawkish bearing. The same can be said for potential risk appetite trends. While there are certainly fundamental cracks in the euro’s foundation, the dollar and pound can easily be labeled the risky currencies in their respective pairs given the policy biases of the central banks and the influence of the big-ticket data scheduled for release (namely 3Q GDP numbers). At the same time, positive performances on these growth reports can backfire and set the euro on the other end of the risk spectrum.

For its own health, the euro will also have its own fundamental catalysts to respond to (though these anticipated drivers will yield to any significant shifts in its largest economic counterparts). With the ECB scheduled to announce its policy deliberations in the same week as the Fed and BoE (the following week), there will be an increased interest in relative policy. This could leverage interest in the inflation readings (like the German CPI, Eurozone M3 and Eurozone CPI estimate) as well as growth measures (such as German employment, Eurozone consumer confidence and Eurozone unemployment). If we were looking for pure volatility, the German unemployment change and GfK consumer sentiment survey have the best history for driving notable moves. Off the docket, we will watch ECB policy chatter as Weber leads the divergence from a neutral majority to try and encourage stimulus withdrawal. It will also be important to monitor the market’s confidence in the region’s financial health. Spain, Portugal and Italy are all planning to take the bond markets vote of confidence; and the Bank of Portugal is scheduled to release a survey of its credit health. All of this will help give shape to Europe’s future.

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