EUR/USD Forecast Dec. 1-5

EUR/USD  managed to stage a recovery of sorts, as the greenback did not shine. As we enter the last month of the year, the key event this week is clearly the ECB rate decision.  Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.

Germany’s IFO business confidence bounced back up after long months of decline,  joining the ZEW number. While German inflation dropped to new lows, the figure for all the euro-zone did not fall below 0.3% expected. In the US, GDP was  surprisingly revised to the upside, but the components left some doubts and consumer confidence disappointed. The big bulk of data before Thanksgiving was underwhelming: durable goods orders were mixed, jobless claims badly disappointed, new home sales missed and only the Core PCE Price Index eyed by the Fed provided a relative beat on an important figure.

EUR/USD daily chart  with support and resistance lines on it. Click to enlarge:

1. Manufacturing PMIs: Monday, data for Spain  is released at 8:15,  for Italy at 8:45 and the final all-European number at 9:00. Spain  enjoyed some growth in October with a score of 52.6 points and is now expected to see 53. Italy remained below the 50 point mark separation growth and contraction with a score of 49 points and is now likely to see it tick up to 49.5. With disappointments in Germany and France in the initial reads, the all-European manufacturing PMI for November stood on 50.4 points in the first read and a confirmation is likely now.
2. Spanish Unemployment Change: Tuesday, 8:00. Employment in the zone’s fourth largest economy is very seasonal, and unemployment is very high. For the month of  October, after the tourism season ends, unemployment jumped by 79.2K. Another rise is expected for November: 57.3K.
3. PPI: Tuesday, 10:00. A relatively stable euro in  October and a slide in oil prices probably weighed on producer prices during this month. PPI saw a rise of 0.2% in September, beating expectations. A rise of 0.3% is on the cards now.
4. Services PMIs: Wednesday,  data for Spain is released at 8:15, for Italy at 8:45 and the final all-European number at 9:00. The services sector is doing better across the continent. Spain had  nice growth at 55.9 points in October and is now predicted to reach 56.2 points. The Italian services sector held its head above the water with 50.8 points and a similar 50.9 number is forecast now.  The initial read for November for the 18 country monetary union stood on 51.3 points and a confirmation is the baseline forecast.
5. Retail Sales: Wednesday, 10:00. The volume of retail sales in the euro-zone plunged by 1.3% in September, mostly due to a big drop in German sales. A bounce is likely now for the month of October: +0.6%.
6. Retail PMI: Thursday, 9:10. This often overlooked purchasing managers’ index by Markit provides an early look into the retail sector. 4 months of contraction were seen, with the PMI standing at 47 points in October. A sub 50 figure is likely for November.
7. ECB Rate Decision:  Thursday, decision at 12:45 and the press conference is at 13:30. The stakes are high for this ECB meeting, even if rates are not expected to change. They have reached their lower bound. With ongoing low inflation and a lack of real growth, the European Central Bank has hinted of readiness to accelerate its expansion of the balance sheet. The goal is to enlarge the balance sheet towards the March 2012 levels – a total expansion of around 1 trillion euros using various means: the targeted loans to banks (TLTRO) and the buys of Asset Back Securities (ABS) are already in play. We will know the results of the second TLTRO only in the following week. This leaves the big question open: will the ECB also buy sovereign bonds? QE or no QE? Recent hints show the determination of Draghi and VP Constancio. to move ahead, with or without German approval. However, will Draghi  announce it now? Hint that it will happen in Q1 or convey a calm message before Christmas? This is the big question. A lot depends on the updated forecasts for inflation and also for growth, that are updated in this December meeting.  There is a good chance that Draghi will  hit the pedal and make a big announcement towards QE, citing  deteriorating forecasts.
8. German Factory Orders: Friday, 7:00. The zone’s powerhouse saw orders at factories rise by 0.8% in September after a fall in August. For October, we can expect another small advance of 0.6% now.
9. Revised GDP: Friday, 10:00. According to the initial numbers, the euro-zone grew by 0.2% in Q3 2014 as Germany escaped an official recession and France grew by 0.3%.  This figure will likely be confirmed in the final read.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar  began the week with a climb from the lows of 1.2360 (mentioned last week). It managed to top 1.25 but  had a hard time holding on to this level.

Live chart of EUR/USD: [do action=”tradingviews” pair=”EURUSD” interval=”60″/]

Technical lines from top to bottom:

1.30 is more than a round number. The pair bounced off this line before making the big fall. The  1.2920 level was the initial low and  should be watched as well.

1.2850 worked as support in September and later capped the pair.1.2775 proved to be a stubborn top in October 2014 and is the important resistance line to the upside.

1.27 is a round number and also worked as  resistance to a recovery attempt. This is followed by 1.2660 – which  marks the beginning of long term uptrend support.

Below, 1.2570 is the initial low seen in October and now a line of resistance. The next line is critical: of 1.25, which is USD/EUR at 0.80. The pair flirted with this line and even dipped below it in October.  This  is key resistance now.

1.2440 is only a pivotal line within the recent range, and now the round number of 1.24 has established itself as support.  It  is followed by 1.2360, which worked as support more than once, including in November 2014.

1.2250 served as support several times in that summer, and 1.2170 was the “shoulder” in the inverse H&S pattern around the same time. The last line is the 2012 low of 1.2040.

Even lower, the post crisis low of 1.1875 should be watched, as well as 1.17, which was the launch value of the pair in 1999.

Downtrend resistance well respected

As the thick black line shows, the pair is trading under downtrend resistance since mid  October. This line should be watched in recovery attempts.

I remain  bearish on  EUR/USD

While US indicators leaned  mostly to the downside, allowing the  pair to recover, the US is still on a steady track to tightening.  On the  other side of the Atlantic, even if inflation is “only” at lows already seen, it is still too low for a very long time.  This ECB meeting is more special, as it features forecasts. Draghi said that more action is to be taken if forecasts deteriorate. With another big drop in oil prices, it is hard to see how forecasts can turn around. Draghi’s recent  stance is somewhat more urgent. Even if he doesn’t announce QE right now and this depends on the TLTRO in the following week, he will not want to wait until the next meeting to send a strong message. It’s only in 6 weeks. Europe needs a  weaker euro as an urgent Christmas present for boosting inflation and exports and Draghi certainly knows how to deliver.

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Further reading:

• For a broad view of all the week’s major events worldwide, read the  USD outlook.
• For the Japanese yen, read the  USD/JPY forecast.
• For GBP/USD (cable), look into the  British Pound forecast.
• For the Australian dollar (Aussie), check out the  AUD to USD forecast.
• USD/CAD (loonie), check out the  Canadian dollar forecast
• For the kiwi, see the  NZDUSD forecast.