EUR/USD Monthly Fundamental Forecast – May 2016

The EUR/USD  shocked markets in the last days of the month after Eurozone GDP surprised to the upside and the weaker US dollar sent the euro to trade at 1.1454. The euro saw a gain of 0.65% on the month and is up 5.47% year to date.

The April preliminary Consumer Price Index showed headline inflation in the red for the month. CPI came in at -0.2% on a year-over-year basis, comparing unfavorably to the Thomson Reuters consensus analyst estimate for an index value of -0.1% and the March figure of 0%.

Stripping out volatile food and energy prices, the ‘core’ CPI reading showed inflation growth of 0.8% year-over-year, down from 1% in March and below analyst expectations for a pace of 0.9%.

There was limited reaction out of the Euro following the release. It is currently trading higher today by 0.27% versus the US dollar at a rate of $1.1382.

Inflation rose throughout much of 2015 after slumping to its deepest deflationary levels since the depths of the global financial crisis. However, since January it has dipped back into the red, which brings into question the effectiveness of the enormous stimulus program the European Central Bank is currently implementing.

While the highly accommodative stimulus plan dating back to 2014 began to boost inflation last year, recent trends suggest its impact is diminishing in the face of a fragile global economy.

The US dollar is expected to recover from its lowest point and could start this path after the nonfarm payroll report due the beginning of the month. The ECB and FOMC will be on the speak circuits but there are no meetings scheduled in May. Mario Draghi is expected to talk down the euro. He may refer to the recent criticism from Germany that the ECB’s low rates were squeezing savers. Draghi defended this policy of printing money and keeping borrowing costs at rock bottom saying this strategy proves to be affective. Draghi also called on euro zone governments to help get the region’s sluggish economy on a more solid footing through economic reforms. Market volatility is expected.

The euro is expected to trade near the 1.12 level this month except during patches of market volatility.

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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