EUR/USD Monthly Fundamental Forecast December 2014

Outlook and Recommendation

The EUR/USD fell as the month closed but held in a tight range between 1.23-1.25 as traders now focus on the ECB meeting this week. The euro is trading at 1.2452 as the dollar soared on consumer spending and the OPEC decision which will act as stimulus in the US.

The US economy is in good health, expanding by 3.9% at an annual rate in the third quarter of 2014, outperforming most countries in the developed world. We forecast annual real GDP growth of 3.2% in 2015 as consumer spending is supported by strong job creation, low interest rates and low levels of household debt. The Republican Party has won a Senate majority in the mid-term elections. Taking control of Congress could force Republicans to be less obstructionists in 2015-16.

US growth will be relatively strong for an industrialized economy over the long term, as labour productivity growth remains healthy. Technological progress will be an important driving force, but the stimulus from labour force increases will fall. Although US growth will remain strong in comparison with other developed economies, emerging markets will close the gap and China’s economy is forecast to overtake the US in the middle of the next decade, measured at market-exchange rates.

Europe, by contrast, remains the sick man of the global economy. Mario Draghi, the president of the European Central Bank (ECB), is working feverishly to prevent another recession. The ECB cut its main interest rate in September and began an asset-purchase programme—measures that could help the economy around the edges but will not be game-changers. The euro zone grew by 0.2% quarter on quarter in July-September, narrowly avoiding recession. Europe’s banking system is on the slow road to recovery, but lending is still falling in annual terms. Debt levels remain high, budgets are strained and the political mood is sour almost everywhere. The Russia-Ukraine crisis has badly damaged investor sentiment in northern Europe, which has drained some of the life out of the German economy.

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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