Fundamental Forecast for Euro: Bullish

- The weak September US NFP report helped lift the EURUSD to new 2013 highs.

- The Euro was able to rebound against the commodity currencies as tensions in Chinese markets arose.

- Mixed PMI surveys didn’t deter Euro bulls – sign of evolving sentiment?

The Euro was the second best performing currency this week overall, gaining another +0.84% against the US Dollar and closing above $1.3800 (1.3802 in New York on Friday) for the first time since November 2011. The recent theme dominating Euro trading continued to persist: as long as there are signs of a continued economic recovery, the Euro should have the opportunity to rally with the European Central Bank remaining on the sidelines.

The Euro’s gains this week extended beyond the safe have complex which hadn't been the case in weeks past, although the outperformance exhibited against the commodity currencies (the Australian, Canadian, and New Zealand Dollars) wasn’t necessarily due to incoming economic data performing in excess of expectations. Rather, risk aversion remained elevated in the wake of the US fiscal deal, though emanating from Asia (Chinese liquidity concerns), not North America (US fiscal and monetary uncertainty).

Market participants are seemingly adjusting their outlook on the Euro in a more positive light as these international issues bubble up. Although October French, German, and broader Euro-Zone PMI survey data slipped overall from September (signaling slower growth), the simple fact that growth conditions remain buoyed seemed to be the ‘big picture’ takeaway, as the Euro ultimately rallied on this week’s mixed data releases.

Even if the Chinese liquidity concerns abate thereby removing a negative fundamental influence on the commodity currencies, the Euro appears poised to perform well in its own right as incoming economic data looks set to restart its slow rebound. The German GfK Confidence Survey for November on Tuesday should improve, signaling that consumers in the Euro-Zone’s largest economy see an improving economy over the coming month. A beat here (7.2 expected from 7.1) would lay the groundwork for positivity around the Euro at the start of the week.

Wednesday’s economic docket poses the most risk to the Euro, though the expected uptick in volatility resulting from the data releases may prove to favor further Euro gains. The 3Q’13 Spanish GDP report will be released on Wednesday, and while the yearly figure should show a continued recession (-1.2% from -1.6% (y/y)), the quarterly reading may show meager growth (+0.1% from -0.1% (q/q)) for the first time since the 1Q’11 (+0.2%). While these data hardly suggest the crisis is over, the psychological effect of seeing positive growth figures in the periphery may be significant.