EUR/USD Forecast – December 3-7

EUR/USD tested higher ground but eventually remained almost unchanged as an unconvincing deal was agreed for Greece. After getting very close to long-term downtrend resistance, will the pair break higher or fall? A very busy week awaits us at the beginning of the new month: The ECB’s rate decision and Mario Draghi’s speech are the highlights. Here is an outlook for the main market movers  and an updated technical analysis for EUR/USD.

Last week, the Eurogroup and the IMF agreed on long term targets for Greece: 124% in 2020, but some details are still missing. One of the pillars of the agreement, the buyback program, also seems to be unraveling. ECB President Draghi remarked that the recession will last till the second half of 2013, and said the ECB will do whatever it takes to keep the EUR stable. In the US, comments related to the fiscal cliff are moving the greenback, and indicators continue moving currencies in a risk on / risk off mode. Volatility is set to rise.

Updates: Spanish data has look surprisingly strong this week. Manufacturing PMI rose nicely, coming in at 45.3 points. Employment numbers also looked good, as Unemployment Change fell sharply to 74.3 thousand. This was well below the market estimate of 90.0K. Italian Manufacturing PMI came in at 45.1 points, slightly below the forecast of 45.9. Euro-zone Final Manufacturing PMI rose to 46.2, matching the forecast. The Euro-group finance ministers met on Monday in Brussels, with the Greek debt agreement at top of the agenda. The EU finance ministers are meeting on Tuesday in the same venue. Euro-zone PPI posted a slight gain of 0.1%,  a notch higher than  the estimate of 0.0%. Greece has offered to purchase 10 billion euros of its national debt, as part of the new bailout agreement aimed at resolving the country’s severe debt crisis. Market sentiment was positive after the Greek government offered a premium on markets prices for Greek bonds. The EUR 10 billion buy-back,which  could allow Greece to retire up to EUR 30 billion worth of debt, is scheduled to conclude on December 17. The euro rally against the dollar continues, as the euro briefly pushed across the 1.31. line. EUR/USD was trading at 1.3091. Spanish Services PMI came in at 42.4 points. The index has been below the 50 line since July 2011. Italian Services PMI dropped to 44.6, below the forecast of 46.0. Euro-zone Final Services came in at 46.7, above the estimate of 45.7 points.  The Spanish 10-year Bond Auction posted an average yield of 5.29%. This was a drop from the previous yield of 5.52%. Euro-zone Retail Sales slipped badly, declining by 1.2%. The estimate stood at -0.1%. Euro-zone Revised GDP declined 0.1%, matching the forecast. German Factory Orders looked very sharp, jumping 3.9%. This crushed the estimate of a 0.9% gain. As expected, the ECB held its Minimum Bid Rate at even 1.0%. The markets are paying close attention to the ensuing ECB press conference, looking for some hints regarding the central bank’s future monetary policy. EUR/USD has edged higher, as the pair was trading at 1.3077.

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

1. Manufacturing PMIs: Monday, 8:15 in Spain, 8:45 in Italy and a final figure for the euro-zone at 9:00. These are important forward-looking figures. Manufacturing sectors in Spain, Italy and the Eurozone continued to decline in October; Spain went down to 43.5 from 44.5 in September, Italy’s reading was 45.5 following 44.5 in the previous month, and the Eurozone Manufacturing PMI  reached 46 from 47.4 in September. Italian manufacturing PMI is expected to reach 45.9 while the eurozone  is predicted to be confirmed at 46.2, according to the initial figure.
2. Spanish Unemployment Change: Tuesday, 8:00. The number of unemployed surged in October by 128,242 people amid the deepening recession. More than 4.83 million people were registered as unemployed by the end of October, a 2.7% increase from September. Spain is in its second recession in three years. The Spanish government is between a rock and a hard spot. The pro-independence, less austerity results of the elections in Catalonia also complicate the situation.
3. ECOFIN Meetings: Tuesday. ECOFIN December meeting in Brussels, attended by finance ministers from 27 EU member states will try to choose a new single bank supervisor which is an impossible mission according to Sweden and Luxembourg delegates. Sweden, a non-euro-zone party opposes this move since Countries outside the euro zone cannot be represented on the ECB governing council. However unless the banking supervisor is elected, bailout funds cannot be dispatched to banks in need.
4. PPI: Tuesday, 10:00. Prices of manufactured goods in the EU rose 0.2% in September following a 0.9% increase in August. Consumer inflation went above the ECB’s target of 2.0% reaching 2.5% in October. A further rate cut will help reduce borrowing cost for euro zone households and companies, but analysts believe the benefits will be modest since Banks   will be disinclined to lend, especially in poorer, indebted euro zone countries. A flat reading is expected now.
5. Services PMIs: Wednesday.  8:15 in Spain, 8:45 in Italy and a final figure for the euro-zone at 9:00.  Service sector activity improved marginally in the PIIGS, but continued to deteriorate in Germany and especially France during October. Spain Services PMI went up modestly to 41.2 from 40.2 in September but still suffers from a sharp contraction in activity amid the ongoing economic crisis and weak labor market. Italy increased to 46.0, up from 44.5 in September, still below the 50 point line amid declines in business activity both in the EU and the US during October. The eurozone service PMI contracted to 46.0 from 46.3 n September amid a widespread decline in the major economies. No change is expected in the service sectors.
6. Retail Sales: Wednesday, 10:00. Retail sales in the euro area declined more than expected in September, down 0.2% after recording a modest increase of 0.2% in the previous month. Analysts expected sales to drop 0.1%. Meanwhile retail sales in EU27 moved up 0.1% following a flat reading in the previous month. A decline of 0.1% is expected this time. Germany posted a big disappointing drop in sales.
7. Revised GDP: Thursday, 10:00. The euro-zone economy shrank 0.2% in the second quarter following a similar decline in the first quarter., placing the zone in an official recession. Household consumption also dropped 0.2% in the second quarter. The Euro-zone economy has been suffering because of the Euro debt crisis, and a lower GDP should be currency negative. A contraction of 0.1% is expected.
8. German Factory Orders: Thursday, 11:00. German factory orders plunged the most in a year in September declining 3.3% following a 0.8% drop in the previous month. EU’s debt crisis weighs on Germany’s growth causing companies to reduce investment. The sharp drop mossed predictions for a 0.4% decline. The weak data follows a drop in Business confidence and a rise in unemployment rate indicating the EU recession has reached Germany. A gain of 0.9% is forecasted this time.
9. Rate decision and ECB Press conference: Thursday, 12:45, press conference from 13:30. Thursday, 12:45.  There are many reasons for cutting the rates in the euro-zone: a slower rise in prices, the danger of Germany entering a recession and a potential credit crunch. Nevertheless, Draghi does not seem to be in rush to act just yet. There is a better chance that a 0.25% rate cut will wait for January. A rate cut now would be a small surprise, weighing on the euro. No cut would set the focus on the press conference, where Draghi could make thicker hints about a move in January. In any case, no positive words are expected, and it’s hard to see the euro rising in response to the rate decision.
10. Mario Draghi speaks: Friday, 10:00. ECB President Mario Draghi will speak in Budapest. He may comment on the Eurogroup’s decision to maintain Greece as an active member in the EU and also talk about the EU’s economic. His recent words about the crisis not being over will probably be heard once again.
11. German Industrial Production: Friday, 11:00. German output in September dropped by 1.8% in September a 4 month low, following 0.4% decline in August, reconfirming the contraction in the strongest Eurozone member. Following these weak readings, the ECB reduced its forecasts to a 0.4% contraction this year and less than a 1.0% growth rate in 2013. A drop of 0.4% is predicted.
12. Jens Weidmann speaks:  Friday, 15:00. Deutsche Bundesbank President Jens Weidmann will speak at the KFW Banking Group event, in Berlin. The German central bank has traditionally been hawkish and lately didn’t support the OMT. There was even some talk that Weidmann could resign, although this doesn’t seem to be the case anymore.

*All times are GMT.

EUR/USD Technical Analysis

€/dollar started the week with a filed attempt to break over 1.30. This was followed by a significant slide to the 1.2880 line (mentioned last week). The pair then made an impressive recovery and even reached the 1.3030 line before bouncing off and closing lower, at 1.2986, little changed from the previous week.

Technical lines from top to bottom:

1.34 was a stubborn cap during the spring of 2012 and is the far line in the distance. Below, 1.3290 served as resistance before the pair collapsed in May.

1.3170 worked very well as a double top during September 2012 and is now the top frontier of the range. A failure to get closer to this line shows that the pair has limited momentum. 1.3140 was the high of October and is minor resistance before 1.3170.

1.3080 capped the pair in September and then again in October. 1.3030 provided some support at the same period of time, and also at the end of November 2012. Both are minor in comparison with the next line.

The very round 1.30 line was a tough line of resistance for the September rally. In addition to being a round number, it also served as strong support. It recently worked as a battleground and the pair is now ready for another battle around this line. It is closely followed by 1.2960 which provided some support at the beginning of the year and also in September and October – the line is weaker now.

1.2880 provided some support in October and also in late November. It proved to be a backstop on the initial false rally after Obama’s victory. 1.28 is the bottom border of the range, and was eventually left behind. The pair fell to this low in September and later got close to it.

1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now a pivotal line in the range.  1.2690 was the new low after the November breakdown, and also provided support on a second downfall attempt in November 2012.

1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.

Below, the round number of 1.25 is not only of high psychological significance (USDEUR 0.80) but also worked as support during the summer of 2012. 1.2440 is already a stronger line, that was a clear separator during August.

Below, 1.2390 was resistance in July. 1.2250 is lower support, also at that time.

Capped by Long Term Downtrend Resistance

The line extending from the 2011 peak of 1.4940 (a green line on the chart)  is very close now, and so far capped the pair very nicely. It should be closely watched.

Still in the Narrowing Channel

Euro/dollar made a big comeback and crept back into the narrowing channel that characterized its trading during September and October.  The break above what was uptrend support, now higher than earlier, is a bullish sign. However, this line is becoming weaker now.