EUR/USD Monthly Fundamental Forecast – March 2016

Outlook and Recommendation

The EUR/USD hit the skids on the last day of the month after Eurozone inflation tumbled again. The euro ended at 1.087 down 0.3% for the month. Last week, German sentiment indicators have given the thumbs down. In contrast with autumn 2014, there are now good reasons for expecting weaker growth: Tailwinds from the 2014-euro depreciation are fading, and the difficulties faced by China and other emerging markets are taking their toll. The same is also true of other euro zone countries, which means that rosy forecasts, including those of the ECB, are set to be revised downward. There is a growing chance that the ECB will do more at its March meeting than simply lowering its deposit rate.

The ECB would aim to protect banks from unintended harm if it decides next month to ease policy, ECB Vice President Constancio said. ” …. we will have to mitigate the effect of that on banks as other countries have done – Switzerland, Japan, and so on,” he said, referring to countries where central banks have adopted a tiered system of negative interest rates. According to Constancio, the ECB “may very well decide to act. That’s certainly a possibility, but we are not trying to build up expectations”

The start of the year proved how fragile investor sentiment has become after a long bull market. It is worries about a depreciating Renminbi and weakening growth momentum in China which caused the turmoil in financial markets – a déjà-vu from August 2015. Chinese authorities made matters worse by first introducing circuit breakers and consequently closing stock markets to prevent a complete meltdown and by suspending the program again later in the same week. Investors’ waning confidence in Chinese authorities’ ability to steer the value of the currency and the real economy as such caused risk assets to correct massively around the globe. Energy prices collapsed further intensifying deflationary fears. In all this doom and gloom which markets are signaling and which is not fundamentally motivated, stock markets have reached clearly oversold levels. Sentiment has plunged and risk aversion has reached exaggerated levels given that macroeconomic data have not changed materially over the past month.

There is widespread concern that the US economy is sliding into recession. However, the indicators due out, such as the employment report and the purchasing managers’ indices, are more likely to show a robust, if unspectacular, US economy. In the euro zone, the inflation rate will probably drop back again to 0.1%

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

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March 1, 2016