Fundamental Forecast for Euro: Neutral

- Uncertainty after the ECB’s rate cut and ahead of key data held the Euro back initially…

- …and it was only after key event risk had passed the Euro finally rallied.

- Retail trader positioning suggests that the EURUSD could continue to fresh highs.

Just a week after the European Central Bank surprised market participants with a 25-bps rate cut, the Euro had already shaken off any fundamental shackles and instead found itself as a top performer in the G10 FX space. The Euro was only bested by the New Zealand Dollar by a mere +0.05%, while gains were flush elsewhere. The EURUSD closed up a modest +0.96% at $1.3496, while the EURJPY was the best EUR-cross performer, gaining +2.08% to close the week at ¥135.21.

Last week we suggested that any further negativity might have been already priced into the Euro, absent a further deterioration in data. Accordingly, with no such developments occurring – incoming data was light and stable relative to expectations – the Euro was given room to rally with conditions abroad proving favorable for the single currency.

Indeed, with the Senate Banking Committee’s confirmation hearing of Federal Reserve Chairwoman nominee Janet Yellen revealing no evidence that monetary policy would change anytime soon, US yields took a step back and risk appetite surged across the globe. The EURUSD was able to climb back towards $1.3500 resulting from Ms. Yellen’s commentary by the end of the week, and shifts in retail trader positioning suggest that the EURUSD could continue to climb going forward.

An extended rebound for the Euro, just as follow through on the prior week’s breakdown, will require several factors to move in the Euro’s favor before a clear trend will be defined. This past week, there was little negativity emanating from the economic docket, and no opportunity was provided for a continuation lower. Sentiment may ebb from ‘little negativity’ to ‘little positivity’ as incoming data is seen perking higher.

On the heels of the ECB’s rate cut, market participants may be predisposed to expecting that incoming data will be weak; signs of resiliency will provide the fundamental padding for further gains. On Tuesday, the German ZEW survey should show improvements in both the Current Situation and Economic Sentiment subcomponents, suggesting at least stabilization in 4Q’13 growth prospects thus far.

On Thursday, preliminary November PMI survey figures are due from across the region, on what will be the most important day on the calendar for the week. In every aspect, the PMI survey figures due are expected to improve – each of the manufacturing and services figures for France, Germany, and the broader Euro-Zone.