Fundamental Forecast for the Euro: Neutral

The euro staged a key technical breakout against the US dollar, rallying despite continued fears over Greek fiscal solvency and threats to the euro zone. A key sentiment shift warns that the US dollar could once again continue lower through short-term trade. And though the euro remains at risk due to troubles surrounding Greek fiscal aid, a busy week of economic event risk may actually leave EURUSD risks to the topside through upcoming trade.

Great uncertainty surrounds whether the International Monetary Fund (IMF) will disburse its next tranche of aid to the beleaguered Greek government, setting a de facto deadline of August 20 before 7 billion euros in Greek debt comes due. Such a hard deadline raises the possibility that euro zone members may once again be required to come to Greece’s aid. Growing populist opposition to fiscal bailouts would make such a solution a tough pill to swallow, and it will be critical to watch any and all official commentary on the Greek debt crisis. Our own Senior Technical Strategist said he hasn’t been trading the euro because the pair can move 100 pips on an unexpected official speech. Needless to say we advise caution amidst considerable uncertainty surrounding the single currency.

A busy week of European employment, inflation, and Purchasing Manager Index data as well as US employment numbers likewise promises significant intraday volatility. Traders are likely to place extra emphasis on employment data out of Germany—Europe’s largest economy and recently the engine driving EMU growth. Consensus forecasts call for Germany’s unemployment rate to drop to its lowest levels since reunification, and lofty expectations leave plenty of room for disappointment.

Late-week US employment figures may nonetheless prove the largest market-mover on the week. The US Dow Jones Industrial Average topped earlier this month as investors unease on the future of domestic expansion grows. It will be important to watch whether May’s US employment numbers and whether growth has indeed slowed in the world’s largest economy. An unusually wide range in analyst forecasts promises significant post-release moves out of US Dollar-based currency pairs.

It is shaping up to be another exciting week for the fast-moving European currency. This analyst has been calling for a substantial EURUSD turn lower for some time now, but the most recent shift in sentiment leaves risks to the topside before we see scope for further reversal. The deciding factor could very well be broader financial market trends and whether equities can break out of their recent downtrend. As of Friday’s close, the US S&P 500 had tested but failed to break its downward-sloping trend channel dating back to its multi-year high. Holding trades may prove difficult given sharp an unexpected intraday price swings. Yet risks remain slightly to the topside as the EURUSD trades above its previous downward-sloping trend channel.

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