By FXEmpire.com
EUR/USD Monthly Fundamental Forecast April 2012
Outlook and Recommendation
The EUR/USD is trading at 1.3084 at this writing.
EUR has settled into a comfortable 1.30 to 1.35 range. Factors that are working in favor of the EUR include: the ECB having succeeded in removing tail risk, inflationary pressures introduced by oil prices and the impact of LTRO and some resolution for Greece. However working against the currency is the risk that low growth poses to European austerity and bearish investor sentiment. We expect bouts of risk aversion, growth fears and contagion to weigh on EUR, and accordingly hold a Q212 target of 1.29.
We expect the FOMC to hold the Federal Funds Rate between 0-0.25percent into 2014. We see risk that the FOMC will undertake additional monetary easing during H2 2012, perhaps via sterilized asset purchases. That risk is contingent on the performance of the US economy relative to the FOMC’s most recent forecasts. The FOMC’s evolving views on inflation, growth, and employment are as follows. The FOMC sees growth improving slightly over the projections that it made at the start of the year, although incoming data are essentially consistent with real GDP growth in the same range (2.2-2.7%). Unemployment data have been better than expected early in the year although are still “unacceptable” in light of the Fed’s dual mandate. The FOMC is viewing higher headline inflation as temporary phenomenon caused by higher gasoline prices, and notes that core PCE inflation remains below the Fed’s inflation target of 2%
The sovereign debt crisis in Europe has somewhat stabilized as the European Central Bank has eased bank funding and liquidity concerns while maintaining a loose monetary policy. Accordingly, a more stable credit market environment facilitated the sizable refinancing requirements of the first quarter of the year. The European ‘firewall’, though somewhat disappointing, has received agreement from major stakeholders and many sovereign debt spreads have eased off their highs. However, the risks are large, particularly as Spain appears to be struggling under strict austerity and disappointing growth. In addition, credit-default swap markets, which passed a major credibility test following the Greek debt restructuring, are still discounting Portugal’s inability to service its debt obligations. We expect EURUSD to trend lower, closing 2012 at 1.25, amid periodic bouts of contagion fears and bearish investor sentiment
Central Bank
ECB INTEREST RATE DECISION
Actual: 1%Cons.: 1%Previous: 1%
ECB Interest Rate Decision is announced by the European Central Bank. Usually if the ECB is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the EUR. Likewise, if the ECB has a dovish view on the European economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative, or bearish.
FED INTEREST RATE DECISION
Previous: 0.25%
The Board of Governors of the Federal Reserve announces an interest rate. This interest rate affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the exchange rate. Generally speaking, if the Fed is hawkish about the inflationary outlook of the economy and rises the interest rates it is positive, or bullish, for the USD.
Originally posted here
