Fundamental Forecast for EUR/USD: Neutral
- The preliminary May Eurozone PMI readings aren’t set to improve, giving little reason for the Euro’s downtrend to end.
The Euro was the worst performing major currency last week, with EUR/CHF (-1.64%) and EUR/USD (-1.45%) leading the decline. A revision lower to the final April Eurozone CPI report coupled with signs that the United States would avoid significant trade disputes with China sapped demand for the low yielding Euro.
Concurrently, the fundamental backdrop for the Euro remains rather weak. The Citi Economic Surprise Index, a gauge of economic data momentum, closed last week at -91.7, still deep in negative territory (although no longer at its weakest reading since September 2011). This is a slight improvement from a week ago (-97.9) but not over the past month (-90.0).
Inflation expectations aren’t doing much better than data momentum, both of which have been steadily eroding in recent weeks. The 5-year, 5-year inflation swap forwards finished Friday at 1.702%, down from 1.714% a week earlier. Inflation expectations peaked this year on January 22, when the 5-year, 5-year rate was 1.774%.
It would seem that this would be as good as a time as ever for inflation expectations to turn higher (if they intend to in the