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Euro Limited by Deteriorating Economics, but Soft Dollar Could Offset

Euro Limited by Deteriorating Economics, but Soft Dollar Could Offset

2013-03-15 00:49:00
Christopher Vecchio, CFA, Senior Strategist
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Euro_Limited_by_Deteriorating_Economics_but_Soft_Dollar_Could_Offset_body_Picture_1.png, Euro Limited by Deteriorating Economics, but Soft Dollar Could Offset

Euro Limited by Deteriorating Economics, but Soft Dollar Could Offset

Fundamental Forecast for Euro: Neutral

The Euro was the second worst performing major this past week, adding a mere +0.54% against the exceptionally weak US Dollar, although the Euro’s weakness should not be overstated; it only depreciated by -1.14% against the top Australian Dollar. As I discussed in last week’s Euro weekly forecasts, the big theme coming into this one was to see if market participants would “embrace the ECB’s view, or if the ECB’s bluff is called…a weaker Euro [would] emerge.” In the way of the superficially strong US labor market released last Friday, the Euro was indeed in a starkly darker light on relative basis, despite the European Central Bank’s upbeat post-policy meeting press conference.

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This remains a prominent theme in the coming week, and is why we are holding our Euro forecast at “neutral.” Price action wasn’t exactly kind to the Euro the past 5-days, with the EURUSD setting a new weekly low just above 1.2900 midweek. Data this past week was mostly soft, with inflation data out of both Germany and the broader Euro-zone undershooting the ECB’s medium-term target of +2.0% y/y (last week, the ECB downgraded the region’s inflation forecasts for 2013 to +1.2% to +2.0%, and for 2014 to +0.6% to +2.0% (all yearly rates)). This raises the possibility of a rate cut once again, because there is mounting evidence that credit flow is starting to slow throughout the economy.

In terms of the data due throughout the week, there are several “medium-term” ranked events, according to the DailyFX Economic Calendar, that should test the ECB’s theory that growth will recover “later in the year.” Euro-zone trade data on Monday should show that the region’s industrial and manufacturing production rates continue to slow, as the region in general becomes less competitive. The initial March PMI readings would be revealed in the second half of the week, and this is where the focus is: expectations show modest improvements in the core regions as well as the broader Euro-zone, and some positivity could offer some credence to the ECB’s assertion of improving growth “later in the year.”

Overall, the docket is uninspiring, Italy remains without leadership, growth continues to contract at the quickest pace since the depths of the financial crisis, and unemployment ratesa cross the region are skyrocketing (at all-time highs in the Euro-zone on the whole, as well as in most of the periphery countries). If anything, the Euro looks strong against the Japanese Yen and the US Dollar, who have both come under scrutiny the past several sessions thanks to speculation over the next policy moves. Accordingly, we remain neutral overall, and will continue to respect the EURUSD’s monthly range between 1.2900 to 1.3150. -CV

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