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When we look at the broader activity in the forex markets, the argument can be made that there is no single currency that is confusing traders more than the Euro.  Over the last six months, we have seen instances where the Euro has fallen when conventional wisdom would suggest a rally and we have seen the currency rise during what would generally be considered to be bearish scenarios.

This can make it difficult for traders to get a handle on where the currency is actually heading.  And since the EUR/USD is the most commonly traded currency pair in the currency markets, it makes sense for forex traders to reassess some of the fundamental factors that might be in determining which trends are likely to unfold over the next few quarters.

Inflation and Growth

When we look at the underlying economy data, there are some relatively strong trends that can be visualized.  Overall growth numbers remain well below longer term averages, as there is still a major disconnect in the broader GDP performance that is seen in several member nations.  As long as this continues, the European Central Bank (ECB) will likely pursue monetary policy approaches that do not support bullish moves in the currency.

At the same time, we are seeing a significant lack in inflationary pressures throughout the region.  Over the last few months, we have actually seen deflationary pressures in the region as the CPI data from January actually came in at -0.1%.  This is not an environment that is likely to propel hawkish actio from the ECB, so this is a significant factor that will need to be monitored in the coming months.

Potential For Changes In Interest Rates

Any time we are looking to make an assessment in the economic data for the region, forex traders must view the information through the lens of how it will impact the overall potential for interest rates.  Longer term, the Euro is often used as an important carry trade currency but this will not be the case as long as the fundamental outlook remains such as it is.

This means that there is a certain amount of buying activity that will not be present in the market, so it will be that much more difficult for currency pairs like the EUR/USD and EUR/JPY to gain consistent traction.  This will be helpful in determining potential trends going forward.

By FiboGroup