EUR/USD Monthly Fundamental Forecast October 2012

Outlook and Recommendation

The EUR/USD lost its momentum at the end of the month as worries about Spain and Greece continued to weigh on the single currency. The pair closed that month at 1.2843. Material progress has been made in Europe. The ECB’s bond-buying program decreased the risk of a monetary union breakup, while developments on the banking union front have relieved some fears over bank solvency. Accordingly, the valuation for EUR has shifted, leading to ongoing EUR short covering. The CFTC net short position has narrowed to –US$12 billion (as of September 18th), while risk reversals suggest that the desire to protect against USD upside has faded and technicals have stabilized.

A deceleration in global growth, progress but uncertainty in Europe and diverging central bank policy paths are the key themes that are driving markets. Artificially low volatility suggests that tail risks are low; however, rapidly shifting sentiment is fueling uneven patterns in financial markets. The outlook is for slow progress in Europe, a soft landing in China, loose G4 central bank policy and modest global growth. The most significant concerns from here are: 1) a further deceleration in the global growth outlook; 2) an escalation in the European crisis; 3) a drop in investor and business confidence; and 4) interventionary and reactive central bank policy. Our base case is more encouraging than these risks suggest.

The USD impact resulting from the Federal Reserve’s (Fed) third round of quantitative easing in an uncertain fiscal environment, while complicated by low and slowing global growth, lays the foundation for an interesting debate. On a relative basis the US economy is encouraging; however, it continues to be marked by a weak labor market, fragile consumption, only stabilization (as opposed to a recovery) in housing, and soft business confidence. Meanwhile, progress on the fiscal side has halted pending the November election, while another debt ceiling limit looms later in the fall. The lack of a credible fiscal plan and the expansion of already loose monetary policy are not conducive to a sustainably strong USD

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.

Central Banks: ECB                         

Central Bank Name: European Central Bank

Date of next meeting or last meeting: Oct 04, 2012

Current Rate: 0.750%

Economic events for the month of October affecting EUR, CHF, GBP and USD