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Euro Forecast: After ECB Holds, Italy to Come Back into Focus for Euro

Fundamental Forecast for EUR/USD: Neutral

- The European Central Bank continues to aim for ending its QE program in December, then raising rates by the end of “summer 2019”, citing “receding” uncertainty around its inflation outlook.

- Any goodwill provided by the ECB’s confidence in its policy path was quickly erased by Friday as concerns over the Italian government’s upcoming budget resurfaced.

- The IG Client Sentiment Indexhas returned to ‘neutral’ for the Euro after its late-week reversal.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

For the third week in a row, the Euro found itself in the middle of the pack, gaining ground against four of the major currencies and losing ground against the other three. But this past week, winners and losers among the EUR-crosses were flipped: the Euro performed well against the safe havens and struggled against the higher yielding and risk-correlated currencies. EUR/GBP led the way lower by -0.52%, while EUR/CHF, EUR/USD, and EUR/JPY gained +0.54%, +0.62%, and +1.57%, respectively.

Price action at the end of the week was revealing in a number of ways. The European Central Bank is sticking to its preset policy course as uncertainty around its inflation forecasts is receding, and that’s certainly good news for the Euro given the swirling concern about potential contagion from the Turkish Lira meltdown.

But with Italy back in the news, any goodwill injected into the Euro from the recent policy decision was quickly neutralized. Mario Nava, the head Italian stock market regulator, abruptly resigned at the end of last week amid mounting pressure from the governing Five Star Movement and Northern League citing an “issue that is only political.”

As a standalone development, the resignation is meaningless; however, in context of a pattern of increasingly harsh anti-EU and anti-Euro rhetoric, market participants pushed up Italian bond yields and reined the Euro back in from its post-ECB meeting highs. Now, attention is on the upcoming Italian government budget and whether or not a showdown with Brussels is a fait accompli – particularly if technocrat Giovanni Tria, the Minister of Economy and Finances, is similarly pressured out of his job.

Beyond rising concerns over Italy effectively neutralizing dropping concerns over the ECB’s inflation outlook, the economic calendar should only impact the Euro in a minor fashion.

On Monday, the final August Eurozone Core CPI is due in at +2.0% (y/y), a slight drop from the initial reading reported in at +2.1%. The final core reading for August is set to be confirmed at +1.0% (y/y), down from +1.1% in July. On Thursday, the preliminary August Eurozone PMIs are due, but with all readings due in at or within +/- 0.1 of their final July prints, the impact the data leave should be minimal.

Lastly, on the positioning front, according to the CFTC’s COT for the week ended September 11, speculators flipped remained net-long the Euro to the tune of 11.2K contracts, a slight build up from the 8.0K net-long contracts held in the week prior. Through September, positioning is a non-factor for the Euro (i.e. the risk of capitulation (covering) due to extreme positioning is extremely low).

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

OTHER FUNDAMENTAL FORECASTS

New Zealand Dollar Forecast - NZD Rise to Gain if GDP Sinks RBNZ Rate Cut Bets, Trade War a Risk

Oil Forecast - Brent Up 10% Since August Low, Stubborn Supply Concerns Persist

British Pound Forecast - Sterling Continues to Benefit From a Lack of Bad News

Gold Forecast - Gold Price Hinges on US-China Trade War Developments

Australian Dollar Forecast - Australian Dollar Remains Pressured But May Get Some More Respite

Chinese Yuan Forecast - Yuan Looks to Resumed Trade Talks, Summer Davos Forum for Outlook

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX