Fundamental Forecast for Euro: Bearish

The euro continues to tumble despite the final touches being put on a bailout package for Ireland, as contagion fears have heightened. The E.U. is expected to finalize a plan to provide 85 billion euros to help support the Irish banking sector and the country’s fiscal needs. The funds will come from the European Financial Stability Mechanism (EFSM), the European Financial Stability Facility (EFSF) and the IMF. The troubles in Ireland have been a weighing factor and although there was some brief support from the country’s acceptance of aid, concerns quickly turned to who would be next. Meanwhile, European fundamentals continue to show a sustaining recovery as both the manufacturing and services sectors expanded at a faster pace. German investor confidence also spike higher in November, despite the re-emergence of the debt crisis. Therefore, if European leaders can find a solution that will ease market concerns we could see a rebound in the euro based on existing growth.

Markets have now turned their focus toward Portugal which is making the task of getting ahead of the crisis difficult for the E.U. leadership. Rumors have surfaced that pressure is being placed on Portuguese officials to make steps toward accepting their own aid package, which they have refuted. Nevertheless, markets continue to shy away from the regions debt and if that continues then the problems may not go away until they feel that all the troubled countries are properly capitalized and can meet their short-term needs. Considering that it may take more than one round of help to fully restore investor confidence, we could see the region’s debt issues remain a weighing factor on the single currency.

European Central Bank Governing Council member Axel Weber said Wednesday that the EFSF should be enough to cure markets fears of member insolvency, and if it isn’t, more money will be provided. The tough talk from the head of the German Deutsche Bundesbank will be a key in restoring confidence, as a full commitment from the region’s largest economy to the process has been questioned. The main story line for the week will be how this saga plays out which could make the upcoming ECB rate decision a potential market mover as the central bank’s reaction to the region’s troubles could shape the outlook for future monetary authority. Signs that policy makers are slowing their efforts to remove liquidity from markets will push out the horizon for a rate hike, adding to euro weakness. Despite the overwhelming bearish case, a resolution in Ireland, steps toward solving Portugal’s issues and a strong US labor report could reignite risk appetite, potentially proving short-term EUR/USD support.

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