Fundamental Forecast for EUR/USD: Neutral
- Last week was fairly quiet, given that the Euro only gained or lost more than 1% versus one currency.
- The Euro may be at a bullish extreme, according to three separate sentiment indicators, including our in-house sentiment reading, the IG Client Sentiment gauge.
- Review our Q3’17 EUR/USD forecast as make our way through mid-August.
The Euro had a quiet week last week, only gaining or losing more than one percent versus one major currency (EUR/NZD finished up by +1.72%). Amid a quiet economic calendar and geopolitical tensions rising between North Korea and the United States, the Euro was more or less rudderless and simply along for the ride with whichever way the winds were blowing. To this end, the worst performing EUR-cross was EUR/JPY, which dropped by -0.96%.
In the days ahead, however, a much heavier economic calendar should bring some much needed volatility to the Euro as the rest of the month could be quieter (we are moving into the second half of August after all). In recent weeks, European economic data has slipped: the Euro-Zone Citi Economic Surprise Index is down from +36.3 to +12.6 over the past four-weeks.
Overall, the data due could take a mediocre tone fitting in with the recent deterioration in momentum, according to consensus forecasts. While Q2’17 GDP readings from across the region may actually perk up, data that is more of the leading variety than backward looking is expected to disappoint. Of note, July inflation figures could show further deterioration.
A miss in the July inflation data could highlight the big issue moving forward for the Euro: the Euro itself. Euro strength begets slower rates of inflation. The reality in FX markets is that with inflation so low, the Euro’s strength may only be tolerated for so long. The ECB’s technical assumption for EUR/USD in 2017 is 1.0800; it closed last week just above $1.1800.
As we’ve previously stated, a few more months of a strong Euro, middling energy prices, and persistent underperformance in inflation readings, and it’s easy to envision the ECB taking issue with the market’s hawkish interpretation of the policy adjustments being made.
Market positioning would dictate that any weakness in EUR/USD in the near-term would be of the profit taking variety. Even though positioning has moderated in recent weeks, the Euro long trade remains crowded (relatively speaking). According to the CFTC’s latest COT report, there were 93.7K net-long contracts held by speculators in the futures market for the week ended August 1, thehighest level since the week ended May 3, 2011 (when EUR/USD peaked just below 1.5000).
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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