EUR/USD Weekly Fundamental Analysis, August 31 – September 4, 2015 Forecast

Weekly Analysis and Recommendations:

Early last week, the EUR/USD surged to its highest level since mid-January before sellers came in at 1.1712 to drive the market lower for the week. It wasn’t bullish Euro Zone economic data that drove the Euro higher, but a steep drop in global equity markets and the strong possibility that the Fed would refrain from a September rate hike because of the instability and uncertainty in the global economy. 

The rally suggested that the Euro had become a safe haven currency, but in reality it had not. The move was likely linked to overleveraged short sellers in the futures markets abandoning their positions as investors sought liquidity to meet margin calls and to raise cash during the stock market meltdown. Additionally, when the European Central Bank lowered its interest rate to near zero, the Euro became a funding currency. In other words, stock investors were borrowing Euros to finance long stock investments. When these events turned south, investors sold stocks and bought Euro to pay back the loans. This assessment will likely be supported by a steep drop in the number of short Euro positions in the U.S. Commodity Futures Commission Commitment of Traders report. 

The Euro put in its top for the week and turned lower after China calmed the markets by cutting its benchmark interest rate and reducing the reserve requirement. It also flooded its financial system with Yuan in an effort to provide liquidity, driving the U.S. Dollar higher. 

If volatility falls this week and the financial markets remain relatively calm then investor focus will shift back to more traditional fundamental news. The week opens up with traders focusing on German Retail Sales and Euro Zone flash consumer inflation data. The Flash CPI Estimate is expected to show an increase of 0.2%. Core CPI Flash Estimate is expected at 1.0%. 

Early Tuesday, the return of volatility will be on the minds of traders with the release of China’s official manufacturing PMI data and the Caixin Final Manufacturing PMI report. The official data is expected to show a reading of 49.8. A reading under 50.0 will indicate a contraction. The Caixin data is expected to show a reading of 47.2. Missing these numbers to the downside could produce bearish reactions. Another sharp decline in the global equity markets could be supportive for the Euro. 

The focus the remainder of the week will be on employment with the release of unemployment data from Spain, Germany and the Euro Zone. On Friday, the U.S. will release its latest Non-Farm Payrolls report. It is expected to show the economy added 220K jobs in August. The unemployment rate is expected to drop slightly to 5.2%. Average hourly earnings are expected to come out at 0.2%. 

The U.S. will also report on manufacturing PMI and factory orders. Both are expected to remain firm. 

Assuming that investors have already taken a Fed rate hike off the table for September, the U.S. jobs report is not expected to move the U.S. Dollar much to the upside, however, a lower than expected ready could trigger another rally by the EUR/USD because it will indicate a weakening labor picture. When combined with the current worries about China, this could mean the Fed will push its plans to increase interest rates into December and perhaps into early 2016.

Excessive volatility is expected to hang around for a second week so investors should prepare for another two-sided trade this week. Stock market volatility and movement will dictate the direction of the Euro once again especially with the release of China’s manufacturing activity reports on Tuesday. 

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. 

Reports to Watch This Week: 

         Date                       Time              Curr                             Event                                                             Forecast    Previous