EUR/USD Monthly Fundamental Forecast August 2012
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Outlook and Recommendation
The EUR/USD closed the month at 1.2292 after ECB President Draghi pledged to save the monetary union, which saw the euro jump from its down trend and add over 100 pips in just mintues.
The intensity of the euro zone has compromised the risk/return; from here it is likely to be volatile. The trend is lower, with 1.1877, the June 2010 low, acting as a magnet; however the market is almost exclusively short (the CFTC reports a net short EUR position of -$23.3 billion as of July 24th), leaving EUR vulnerable to a short squeeze. We do not expect a EUR collapse and hold a year-end forecast of 1.23.
Change %: -2.29
After a brief respite following the EU leaders’ summit in late June, euro-centered anxieties returned to financial markets by mid-July, driving the euro lower and borrowing costs in the periphery higher. Economic conditions in the currency union also deteriorated over the last month. The manufacturing PMIs sunk further, while unemployment continued its upward march across most of the region, rising to 11.2% on aggregate (though, the jobless rate declined to a new low in Germany in June). Credit growth remains subdued, while inflation is proving stickier than previously anticipated, staying at 2.4% y/y for the third straight month in July. Adding to the deepening macroeconomic pains is the persistent discord among policymakers as to the appropriate solution to the crisis, and an increasing recognition by many governments that fiscal targets will be missed without additional spending cuts. In this light, the prospect of a sustained recovery looks ever more distant, and we have reduced our growth forecast for 2013 to +0.3% from +0.5%, leaving our 2012 expectation at -0.7%. The European Central Bank (ECB) will have little choice but to step in with additional monetary easing
Q2 GDP figures confirm that the US economy has lost momentum. Growth slowed to an annualized rate of 1.5% —in comparison to 2.0% in Q1 and 4.1% in Q4 of 2011— due to softer, though still positive, contributions from consumption and fixed investment. Personal consumption growth slowed from 2.4% in Q1 to 1.5% in Q2, with expenditure on durable goods falling 1%. Retail sales have contracted month-on-month since April, after moderate gains in Q1. Consumers are expected to remain cautious going forward because of the elevated unemployment rate (only 225,000 new jobs were created in Q2), weak income growth and low confidence levels
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Central Banks: FED and ECB
Central Bank Name: European Central Bank
Date of next meeting or last meeting: Aug 02 (the ECB offered no guidance or assistance as promised)
Current Rate: Eurozone cuts Key Interest Rate to 0.75 % (- 0.25)
Statement highlights of last meeting: Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialized. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.
Central Bank Name: Fed Reserve
Date of next meeting or last meeting: Sep 12 (the fed on the August 1st meeting held rates and policy)
Current Rate: 0-0.25 % (- 0.75)
Statement highlights of last meeting: To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
Economic events for the month of August affecting EUR, CHF and GBP
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BOE Inflation Report
PPI Input m/m
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MPC Meeting Minutes
BOE Gov King Speaks
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Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.comView all of FX Empire Analyst - Barry Norman's Articles