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Bearish EUR/USD Outlook to Gain Traction on Europe's Fragile Recovery

Bearish EUR/USD Outlook to Gain Traction on Europe's Fragile Recovery

David Song, Strategist
Bearish EUR/USD Outlook to Gain Traction on Europe's Fragile Recovery

Fundamental Forecast for Euro: Bearish

Headlines surround the Greek saga may continue impact the Euro in the week ahead, but the dovish forward-guidance laid out by the European Central Bank (ECB) may fuel a further decline in EUR/USD as President Mario Draghi pledges to ‘fully implement’ the quantitative easing (QE) program.

Even though Greece secures a EUR 7.2B bridge loan to meet its obligations with the IMF and ECB, there’s growing skepticism surround the success of the third-bailout program, and the Governing Council may come under increased pressure to further support the monetary union amid the fragile recovery in Europe. Indeed, a slowdown in the Euro-Zone Purchasing Manager Indices (PMI) may undermine the ECB’s scope to achieve its one and only mandate for price stability, and produce near-term headwinds for the single-currency as the central bank keeps the door open to further embark on its easing cycle.

In contrast, the recent comments from the Fed’s Humphrey-Hawkins testimony suggests that the Federal Reserve remains on track to remove the zero-interest rate policy in 2015 as Chair Janet Yellen remains largely upbeat on the economy. As a result, we may see a growing number of Fed officials adopt a more hawkish tone over the coming months and the central bank head may continue to prepare U.S. households and businesses for higher borrowing-costs as the region gets on a firmer footing.

The easing cycle in euro-area accompanied by rising interest rate expectations in the U.S. continues to cast a long-term bearish outlook for EUR/USD, and the pair remains at risk of giving back the rebound from back in March as the fundamental developments highlight the growing divergence in monetary policy. The recent series of lower highs & lows in the exchange rate favors a further decline for the week ahead, but the lack of momentum to break the May low (1.0818) may produce a short-term correction in the euro-dollar as the pair searches for support. - DS

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