eur fundamentals

Euro Unchanged Against US Dollar Despite Dismal Data - What Gives?

Friday, 21 November 2008 21:45:57 GMT  |  David Rodriguez, Quantitative Analyst

The Euro finished nearly unchanged against the US Dollar on the week, as traders ignored news of an official Euro Zone recession and pushed the single currency higher through Friday’s close on a sharp rebound in risky asset classes. The Euro was on the verge of setting fresh 31-month lows against the US dollar on a plunge in the Dow Jones Industrials Average and other key stock indices, but an amazingly quick recovery in risk sentiment pushed the US Dollar and Japanese Yen lower across the board. Forecasts for the Euro will continue to depend on developments in global markets; it seems trading markets have become increasingly desensitized to bearish economic news from the EMU. 

Fundamental Forecast for Euro: Bearish

-   Euro finishes higher despite concerns over worsening Euro Zone economic recession
-   ECB President Trichet softens rhetoric, signalsfurther ECB rate cuts possible
-   Forex Trading Signals take mixed view on Euro/US Dollar—outlook unclear

Given that the Euro/US Dollar pair ignored confirmation that the Euro Zone is officially in recession, there is little reason to believe that a negative string of economic data will do anything to alter the single currency’s short-term prospects. Instead we will look to key economic reports to gauge likely reactions out of domestic and global stock market indices. Before massive losses in global financial markets, currency traders would often buy currencies with the highest yields and with the best interest rate prospects. Yet we see that the direct opposite has been true of the Euro as of late; the single currency sold off sharply on signs that the European Central Bank would keep interest rates higher than many traders had expected. ECB President Jean Claude Trichet has since softened his rhetoric on inflation, however, and interest rate traders have priced in a virtual certainty that the European Central Bank will cut rates by a sizeable 50 basis points at its December 4 meeting.
 
With current market conditions in mind, we may have to keep a close watch on mid-week German and late-week Euro Zone CPI estimates for the month of November. Any indications that CPI inflation remains high will almost certainly dampen expectations for ECB rate cuts, and the Euro could by extension decline against the safe-haven US Dollar and Japanese Yen. Otherwise we will watch market reactions to US and other global economic event risk. A holiday-shortened week in North America may make for especially volatile trading on illiquid trading conditions. – DR

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