eur fundamentals

Euro To Take Its Lead From ECB Rate Speculation

Saturday, 16 August 2008 00:05:13 GMT  |  John Kicklighter, Currency Strategist

Fundamentals and technicals were crumbling for the euro last week. Tallying up the losses, the euro has now trended lower against its US counterpart for a third consecutive week to cover more than 1,300 points in its reversal from record highs. However, until the end of last week, there was still a level of fundamental deniability to the euro’s decline.

Euro To Take Its Lead From ECB Rate Speculation

Fundamental Outlook for Euro: Bullish

- Advanced 2Q GDP numbers show Euro-Zone not immune to cooling in global economy
- A steady dollar rally and fading outlook for the Euro Zone lead EURUSD to six month lows

Fundamentals and technicals were crumbling for the euro last week. Tallying up the losses, the euro has now trended lower against its US counterpart for a third consecutive week to cover more than 1,300 points in its reversal from record highs. However, until the end of last week, there was still a level of fundamental deniability to the euro’s decline. In fact, much of the reversal in EURUSD could more or less have been attributed to the incredible strength of the dollar’s advance as the euro-based crosses were holding firm. That has certainly changed with the news that crossed the wires last week. Now, traders have seen that the Euro Zone isn’t immune to the slowdown in global growth and the trade off between inflation and the potential for a contraction in the economy could be as much a problem for Europe in the future as it has been for the US and UK in the recent past.

In the week ahead, macro data will be a factor in euro direction; but the greater driver will be the influence recent fundamental shifts have on interest rate speculation. Growth in the Euro-Zone is running at its slowest pace in four and a half years thanks to a downturn in consumer spending and fixed investment. At the same time, front-line inflation is still at the most oppressive levels in 16 years. All of this must be laid against the backdrop of comments made by ECB President Trichet at the last rate decision in which the market interpreted a neutral turn – what is considered the lead in to the inevitable dovish second step. However, given the fundamental weight of the data, the reaction seems disproportionate. There were few actual changes to the ECB’s statement to suggest a rate cut is anywhere on the horizon (overnight rate swaps show a cumulative 38 bps of easing through the coming 12 months). What’s more, recent data has shown improvements in key economic sectors, suggesting it is far too early to compare Euro-Zone growth to its American and British counterparts. – JK

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