eur fundamentals

Euro Outlook Remains Bullish on Breakout Versus US Dollar

Friday, 12 December 2008 23:27:56 GMT  |  David Rodriguez, Quantitative Analyst

The euro posted its best single-week performance in eight years, as an outright tumble in the US dollar left the Euro Zone currency as the prime beneficiary of a turn in market sentiment. Currency traders seemingly lost their patience with the US dollar, opting to sell the American currency on dismal developments out of the US economy. The sharp euro recovery stood the test of continued deterioration in global risk appetite; sharp declines in global equity indices were not enough to sink the previously risk-sensitive European currency. Short-term forecasts remain bullish for the euro, as many expect US Dollar weakness to continue through the coming week’s critical string of US event risk.

Fundamental Outlook for Euro: Bearish

-   Euro hits record-highs against British Pound
-   Hawkish European Central Bank rhetoric sends euro through resistance against US Dollar
-   Extreme sentiment accurately forecasts euro turn versus US Dollar

All eyes will turn to the US Federal Reserve, as the Fed’s Open Market Committee will release its highly-anticipated interest rate decision late Tuesday. The euro’s fate will subsequently depend on whether markets will continue to punish the US currency for clearly bearish economic fundamentals. Markets previously ignored dismal US economic data and used the domestic currency as a safe-haven from financial market turmoil—punishing the euro in the process. Yet early signs show that such a trend may have come to an end, and it will be critical to watch Euro/US Dollar price action through the FOMC rate announcement.
 
The European economic calendar may likewise spark noteworthy volatility in the EUR/USD; Euro Zone Consumer Price Index results could potentially reshape forecasts for the future of European Central Bank interest rate policy. Analysts predict that EZ CPI fell to 2.1 percent on a year-over-year basis through November—almost exactly in-line with the ECB’s 2.0 percent target. The key question for monetary policy officials will be whether prices are falling fast enough to warrant further interest rate cuts. Already we hear some ECB officials cautioning against dropping rates below record-lows of 2.0 percent, and such restraint could further take hold on a CPI surprise. The week ahead will likely spark great volatility in the Euro/US Dollar pair, and it will be important to keep track of how the pair reacts to various pieces of highly-anticipated event risk.  - DR

Visit our recently updated EUR/USD Currency Room for more resources dedicated to the Euro.

 

Resources

• free demo account
• forex courses
• open an account
• forex stream
• free webinars