The primary bullish and bearish considerations.
Based on fundamental news, the past week should have been great for the EUR.
- Latest Greek aid deal approved
- Spain bank bailout clears EU
- Uncertainty lifts on Catalonia elections without a clear victory for the main separatist party
However the EUR/USD closed only slightly higher. If this EU week's events couldn't power the ongoing EURUSD rally past 1.3000 in a decisive manner, then how much upside is left?
The primary bullish and bearish considerations.The Bullish :
Here are the factors favoring a continued rally for the EURUSD.
EU Solvency Concerns Muted For The Rest of 2012
Given the above events, we're unlikely to see further bouts of EU angst for the rest of 2012. In other words, EU events are not likely to be a big factor in the closing weeks of this year.
That brings us to focus on the big drivers of risk appetite for all markets.
US Fiscal Cliff: Likely Resolution Favors EUR/USD
With Greece and Spain solvency concerns seemingly over for the remainder of 2012, the US fiscal cliff (aka impending austerity) remains the likely focus for the rest of the year barring any major surprises elsewhere.
The consensus is that some kind of fiscal cliff deal gets done before year end, and that Washington's politicians will again defer any serious tax hikes or spending cuts to a later date in order to preserve the US recovery (and their jobs). That means:
- A growing deficit
- More money printing
- At least a short term relief rally for risk assets like the EUR as markets celebrate the end of fiscal cliff uncertainty
All of these boost the EUR/USD, because they either boost risk appetite or undermine the USD, both of which help the EUR/USD.
The Bearish: The Overall Fundamental Picture is Bearish
- Most of the developed world remains mired in recession or weak growth, as weekly data continues to show.
- Since the start of the EU crisis, EU leaders have done little but buy time, at a cost of adding debt to those who cannot repay it.
- The consensus among most analysts is for 2013 is for flat or negative growth.
So how much upside, if any, is likely left for the pair?
The key to answering this question is to remember that in general, overall risk appetite is the prime driver of the pair, and EU specific events tend to be of secondary importance unless something very good or bad has happened in Europe.
Using the bellwether S&P 500 as our risk appetite barometer below, we can see that the index, and thus risk appetite in general, has been range-bound since the summer (shaded rectangle), despite the announcement of unprecedented easing by most major central banks. In recent years these steps produced enduring rallies. This time, nothing.
Conclusion: Bearish Risk Outlook Means Bearish EUR/USD Forecast
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Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.
