Fundamental Forecast for Euro: Neutral

The Euro finished the week almost exactly unchanged against the US dollar, but US Federal Reserve and European Central Bank interest rate decisions promises substantial EURUSD volatility and potential trend shifts in the days ahead. The US Federal Open Market Committee’s (FOMC) highly-anticipated announcement will likely drive the lion’s share of volatility in USD pairs and broader financial markets. Yet EURUSD traders should not overlook several potentially important Euro Zone economic releases and a similarly significant European Central Bank announcement through later-week trade.

Market expectations leading up to the FOMC rate announcement virtually guarantee major US dollar moves regardless of outcome, the trajectory of the US currency may very well depend on the Fed’s actions or lack thereof. The Euro has been a primary beneficiary of anti-US dollar flows and would likely rally considerably on a USD-bearish result. What that result would look like is admittedly unclear, however. Markets have almost certainly priced in an announcement of further Fed Quantitative Easing measures. Yet the amount of additional QE currently forecast is unclear, and we are at a loss to handicap results ahead of the fact. We will likely need to wait some time after the result to fully grasp its implications for the dollar and other major currencies. Yet recent signs of a potential US dollar reversal suggest that the Fed meeting could potentially bring an important shift in EURUSD trends.

The later-week European Central Bank decision may be overshadowed by the FOMC announcement, but we can’t rule out sharp post-ECB moves. Overnight Index Swaps currently price in exactly 0 probability of a rate hike or cut, but the ensuing commentary could alter forecasts for future moves. As it stands, OIS predict that the ECB will raise interest rates by a cumulative 35 basis points in the coming 12 months. Though this is a paltry sum, it is the fourth-highest among G10 central banks. This has arguably been one of the reasons that the Euro has been a primary beneficiary of anti-US dollar flows and any substantive shifts could force corrections.

The week ahead could prove pivotal for all US dollar pairs, and this is especially true for the EURUSD. After setting significant peaks near the 1.4150 mark, the Euro has failed to make a renewed drive to fresh highs. Heavily one-sided USD-short positioning warns that early signs of EURUSD losses could spark a larger wave of position covering. A week of FOMC and ECB rate decisions could be just the spark needed to determine the future of EURUSD trends.

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