Fundamental Forecast for EUR/USD: Neutral
– Market participants seems confused by what to do with the Euro as longer-term concerns come into focus.
– Despite a soft week, the Euro is still the second-best performing major currency in 2016.
– Compares the Euro’s performance halfway through the quarter to our Q1’16 forecast.
Now a few weeks removed from both the European Central Bank’s and the Federal Reserve’s January policy meetings, and with still several weeks until to the next ones, markets continue to be driven by excessive speculation over central banks’ easing policies and hang-wringing over the latest wave of negative news. Seemingly, the negative sentiment environment has benefited the Euro this year, as it is the second-best performing major currency thus far in 2016 (only next to the Japanese Yen).
Last week’s moderation in risk-correlated assets served as a check on the Euro’s advance; and the Euro’s decline was primed by a difficult environment for it to continuing appreciating in (read last week’s Euro weekly trading forecast, “Further Euro Strength Suspect as Data Deteriorates; ECB Very Likely to Act”).It appears that upcoming shifts in central bank policy – if it’s the Fed backing away from its projected rate hike pathor the ECB loosening monetary policy further – have been priced into the market. Yet conversely, as we outlined in our weekly forecast last week, another 10-bps rate cut by the ECB may not be enough to keep the Euro pinned lower (just like in December 2015). Yet this is an issue that will likely only become directly impactful on the ECB’s March 10 meeting.
Before then, in the very near-term, there is heightened risk to the Euro as the calendar is packed with medium- and high-ranked event risk on the horizon. Event-driven volatility – particularly between the hours of 09:30 GMT to 15:00 GMT – will be well-represented over the next two weeks, starting Monday.
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