EUR/USD Monthly Fundamental Forecast September 2012

Outlook and Recommendation

The EUR/USD closed August at 1.2577. This is a difficult month to sum up, with Mr. Draghi’s pledge to save the euro and Mr. Bernanke closing the month with his Jackson Hole address on the 31st leaving markets skewed waiting for FOMC and ECB meeting later in the month.

Central bank intervention, growth stimulus in China, persistently strong European financial market stress, speculative trading dynamics in commodity markets and uneven directional shifts in emerging-market assets are some of the primary factors swaying capital flows in foreign exchange markets. The US dollar (USD) has been under pressure following three consecutive months of gains versus other major currencies, with the exception of the Japanese yen (JPY).

The US economy continues to struggle to address prolonged weakness in employment conditions, despite timid improvement in leading job-market indicators over the past few months. Recent data on jobless claims and still high unemployment levels indicate a relatively fragile outlook for consumption activity. The USD may be on the defensive as monetary authorities remain committed to maintaining a near-zero short-term interest rate environment and to its large-scale asset (US Treasury and Mortgage-based securities) purchase program aimed at depressing long-term funding costs for both the government and mortgage borrowers. Currency markets will be impacted materially by the mid-September Federal Reserve decision on further asset purchases (so-called QE3). The US fiscal outlook is complicated by the November election.

Event risk in the Eurozone looms and has skewed the risk return profile of EUR. Sentiment has improved but remains bearish with both risk reversals and CFTC positioning suggesting there has been significant short covering. Historically, September has proven the most volatile month of the year, averaging an absolute return of 4%. Fundamentally, the outlook is weak; however it is also a challenge to build in a sustainably stronger USD profile

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 Name: European Central Bank and the US Federal Reserve

Current Rate: 0.750% and 0.25%

Date of next meeting or last meeting: 09/06/2012 (ECB) 09/13/2012 (FOMC)

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