EUR/USD Monthly Fundamental Forecast May 2014

Outlook and Recommendation

The EUR/USD closed a strong month at 1.3867 after climbing to 1.3905 on a weak US dollar and worries about the ECB direction and inflation. The US dollar (USD), which has failed to rally broadly so far in 2014, seems to be disconnected from the improving fundamental momentum shaping the US economy. On a trade-weighted basis the US currency has encountered strong resistance to adopt a steady appreciating trend against its major currency peers, despite isolated bilateral gains versus select currencies. Official rhetoric by the US Federal Reserve (Fed) reaffirmed the authorities’ commitment to a gradual unwinding of monetary stimulus through its paced reduction of large-scale asset purchases, stressing ongoing economic momentum. We do expect that US monetary policy will remain widely accommodating even after the Fed interrupts its unconventional asset-purchase program. Nevertheless, economic activity data for the first quarter of the year showed significant weakness caused by extreme weather conditions. Following the meager 0.1% q/q expansion in the first quarter on an annualized basis, we have adjusted our 2014 growth forecast to 2.6%.

The euro (EUR) remains remarkably strong (versus the USD), shrugging off the escalating geo-political tensions linked to Russia’s annexation of the Crimean peninsula. EURUSD, which approached the 1.40 mark in mid-March, remains highly resilient to geo-political concerns, and defiant of the unfavorable growth and interest rate differentials as compared with the US outlook.

By the end of April EUR was up 1% year-to-date, supported mainly by flows. The resiliency of EUR continues to be a focus of market participants, with most traders, tired of losing short positions, relegated to the sidelines. CFTC traders are net long US$4.8 billion, having cut their positions in half over the last two months as the multi-year EUR uptrend slows.

Forecasters, including ourselves, continue to look for EUR to depreciate by year-end, watching closely for a turn in sentiment and flows that would likely foreshadow such a drop

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 Bank – Fed Reserve

Date of last meeting: April 30, 2014

Current Rate: 0.00% – 0.25%

Central Bank Name – European Central Bank

Date of next meeting: May 08, 2014

Current Rate: 0.25%

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