Fundamental Forecast for EUR/USD: Bearish
– July 28 stress test results could help accelerate path to Italian bank recapitalization.
– Financial market stability, steady US economic data exposes EUR/USD to downside risk.
- FX market volatility is rising ahead of the UK-EU referendum – it’s a good time to review risk management principles.
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Read our Q3’16 Euro Forecast, “Euro Awakes to Brexit Nightmare; Time for a Turn in EUR/USD?â€
On balance, the Euro steadied as we passed into the second half of July, although EUR/USD lost some ground (-0.54%), putting in its lowest closing prices in the post-Brexit world. Elsewhere, one axiom of the post-Brexit world held true: the ‘Europe-centric’ versus ‘Asia-Pacific’ remained (we first noted this developing relationship two weeks back). Sure enough, there were the Australian and New Zealand Dollars and the Japanese Yen at the bottom of the pile versus the Euro last week.
There is a fundamental tug-and-pull at work for the Euro, Brexit related existential concerns aside (more on Italian banks in a minute). As evidenced in Thursday’s European Central Bank press conference, policy officials may have a dovish tilt, but they are neutral in the near-term. Financial market stability (equity markets are rallying seemingly non-stop) coupled with economic data coming in marginally better than anticipated has cultivated an environment allowing the ECB to stay put until at least September, when it next updates its staff economic projections (SEPs).
Speaking of economic data, the Citi Economic Surprise Index has improved to +8.0 on July 22 from -8.6 on June 20. Pressing its July highs, the gauge of Euro-Zone economic data momentum is close to reaching its yearly highs (obvious caveat: it’s an index of relativity, so it’s only good as its inputs – economists). Digressing, there’s not much here that’s negative; what’s driving EUR/USD must be borne elsewhere.
