Fundamental Forecast for the Euro: Neutral

The Euro’s relentless upward march would not be denied last week. Even a pointedly dovish ECB policy announcement failed to slow the advance. In fact, the passing of the rate decision seemed to open the floodgates for a wave of buying, as though bulls were just waiting for the coast to clear.

According to the newswires, investors latched on to a comment in the post-meeting presser with ECB President Mario Draghi where he said the QE program would be reviewed in autumn. When asked if that meant the September policy meeting, he snapped that if it did, he would have said so.

Did the markets pick through a sea of dovish rhetoric to fish out the one pseudo-supportive remark on offer to justify an explosive Euro rally? Perhaps, but that explanation seems fanciful, particularly since revisiting the size of asset purchases has been largely expected in September along with a forecast update.

On balance, either speculation has become disconnected from fundamental news-flow or monetary policy is not truly the central narrative at play. A much-needed dose of clarity may emerge in the coming days as top-tier economic data and official commentary cross the wires.

The preliminary set of July’s Eurozone PMI surveys and German CPI figures bookend the week ahead. Both are expected to head south, with the pace of nonfarm activity growth at the slowest since February and headline inflation dropping back to 1.5 percent, matching the six-month low set it May.

News-flow out of the currency bloc has deteriorated relative to consensus forecasts since the beginning of the month, hinting that analysts’ models may be overstating the economy’s vigor. That opens the door for more downside surprises, undermining the case for a hawkish policy pivot.