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EUR/USD Rebound Could Materialize as May PMIs Seek Lift

EUR/USD Rebound Could Materialize as May PMIs Seek Lift

2013-05-18 04:25:00
Christopher Vecchio, CFA, Senior Strategist
EURUSD_Rebound_Could_Materialize_as_May_PMIs_Seek_Lift_body_Picture_1.png, EUR/USD Rebound Could Materialize as May PMIs Seek Lift

EUR/USD Rebound Could Materialize as May PMIs Seek Lift

Fundamental Forecast for Euro: Bullish

The Euro was the second best performing major currency this past week, though it still managed to shed -1.17% to the US Dollar, with the EURUSD finishing the week at $1.2839. Mainly, the Euro’s strength was most prevalent against the commodity currencies, which remained in liquidation mode thanks to rising fears of a global slowdown and top in the commodity ‘supercycle.’ Clearly then the prior week’s data had little impact on the Euro, as 1Q’13 GDP reports from France, Germany, Italy, and the broader Euro-zone disappointed across every metric.

If the headline growth figures did have impact, it was seen versus the US Dollar, whose own prospects are looking increasingly bullish thanks to a rebound in the housing sector and labor market. The growing divergence between the Euro-zone and US economies is pushing the regions’ respective monetary policies in different directions (albeit a great deal remains speculation).

Rumors emerged late this week that the European Central Bank has been maintaining higher level discussions regarding the implication of negative interest rates on the region’s economy, with several of the larger banking institutions reportedly having been contacted to query the potential boost the measures would provide to the banks. Certainly, this is the ECB’s way of trying to stoke lending to small- and medium-sized enterprises – by punishing the banks that choose to sit on free cash. The Federal Reserve, on the other hand, has been signaling that it is nearing the taper moment for QE3, which should help relieve downside pressure on US yields, thus providing a boost for the greenback.

While the Euro-zone’s economics are facing an increasing disparate period, the Euro is likely to face continued downside pressure, especially against the US Dollar, as the ECB is forced to move closer and closer to implementing its variation of QE. But with a fair share of secondary US data coming in weaker than expected this past week, alongside some improved key figures in the week ahead, there is room for the Euro to make a run back towards $1.3000 versus the US Dollar.

The week ahead is not exactly what one would describe as “frontloaded,” with all of the significant events of the week occurring between Thursday and Friday, according to the DailyFX Economic Calendar. On Thursday, the initial May German and Euro-zone PMI reports will be released, and all facets are expected to show improvement: the German PMI Manufacturing index is expected to rebound to 48.5 from 48.1; the German PMI Services index will return to neutral at 50.0 from 49.6; the Euro-zone PMI Manufacturing index is to signal a less steep contraction, at 47.0 from 46.7; the Euro-zone PMI Services index will rise to 47.2 from 47.0; and the Euro-zone PMI Composite index will regain 47.2 from 46.9.

On Friday, the final 1Q’13 German GDP reports are unlikely to provoke any sort of intense reaction barring a shift lower, which would put the country in neutral or worse, recession, which would be severely Euro negative (the German IFO reports for May are expected to remain on hold, though they should be on the radar). Ultimately, the early part of the week could be dominated by bearish conditions for the EURUSD, given the major technical break; though if the Euro is to set a near-term base and shake recent speculation over the ECB’s intended policies, Thursday and Friday provide the fundamental spark that could turn the Euro’s fortune around, at least against the US Dollar. This week may offer some respite, but beyond that time frame, we are longer-term Euro bears and currently favor selling rallies. –CV

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.