EUR/USD Forecast Feb. 17-21

EUR/USD  managed to move higher within range as economic growth trumped inflation fears. Is a break out coming soon? German economic sentiment and purchasing managers’ indices are among the main market movers of the week.  Here is an outlook on the major events and an updated technical analysis for EUR/USD.

Europe’s locomotive posted a solid growth rate of 0.4% in Q4 2013, beating forecasts for a 0.3% expansion rate thanks to a rise in exports and capital investment. Accompanied with stronger than expected GDP growth from France and other countries, the euro-zone recovery also accelerated and this boosted the euro. The good news beat worries of ECB action. A French ECB member said that the ECB is considering negative rates “very seriously” and the euro took a serious dive. In the US, weak retail sales alongside stood out in a streak of disappointing numbers. The effect of the weak weather is not so temporary, and the weakness is not only weather related.  Let’s start:

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

1. Eurogroup Meetings: Monday. The Eurogroup forum where all Finance Ministers from the Eurozone countries meet to discuss monetary union issues, will gather in Brussels a day before the ECOFIN Council meeting.
2. Current Account: Tuesday, 9:00. The euro zone’s current account surplus increased unexpectedly in November reaching the highest level in seven months with a seasonally adjusted surplus of EUR23.5 billion. November release was better than the surplus of EUR22.2 billion registered in October. Economists expected surplus to contract to EUR19.2 billion in November. On a yearly-cumulated current account, November posted a surplus of EUR215.8 billion, 2.3% of euro area GDP, compared with a surplus of EUR118.0 billion, 1.2% of euro area GDP, for the previous 12-month period. The euro zone’s current account surplus is expected to narrow to EUR19.8 billion
3. German ZEW Economic Sentiment: Tuesday, 10:00. Investors and analysts sentiment in declined mildly in January to 61.7 from 62 in the previous month, contrary to predictions for a rise to 63.4. Nonetheless, investor sentiment is still elevated in accordance with the upturn in German economic growth. ZEW president Clemens Fuest remarked November reading was not a real setback as the fundamentals of the German economy remain strong. Meantime, ZEW Economic Sentiment edged up to 73.3 from 68.3 in December, beating predictions for a 70.2 reading, indicating the Eurozone is finally moving closer to a solid recovery path. German ZEW Economic Sentiment is expected to decline further to 61.3 while ZEW Economic Sentiment is forecasted to advance to 73.9.
4. ECOFIN Meetings: Tuesday. The Economic and Financial Affairs Council, reconvenes after the Eurogroup Meetings. The Council is comprised of the Economics and Finance Ministers of the Member States, as well as Budget Ministers when budgetary issues are discussed, and meets on a monthly basis. It discusses EU economic policy coordination, economic surveillance, monitoring of Member States’ budgetary policy and public finances, the euro (lel, practical and international aspects), financial markets and capital movements and economic relations with third countries.
5. German PPI: Thursday, 7:00. Germany’s manufacturing output prices increased 0.1% in December, following a 0.1% decline in the preceding month. However prices were 0.5% lower than posted a year earlier due to lower costs for energy, commodities and intermediate goods. PPI excluding energy remained flat in December, and down 0.2% from a year earlier. A rise of 0.3% is forecasted this time.
6. French CPI: Thursday, 7:45. French consumer price index increased by 0.3% in December amid sharp rises of services and energy costs. A flat reading in the previous month preceded the rise. On yearly basis, the CPI edged up 0.7%. Economists expected a bigger increase of 0.4%. CPI is expected to fall 0.3% this time.
7. Flash manufacturing and services PMIs: Thursday. European manufacturing and services gained traction in January suggesting the Eurozone is on its way to a solid recovery. PMI manufacturing expanded to 53.9 from 52.7 in December and the services sector climbed to 51.9 from 51.0.  Germany manufacturing sector continued to grow in January reaching 56.3 compared to 54.35 in December while the services index advanced to 53.6 from 53.5. However, the upturn did not include France, the bloc’s second-biggest  economy, where activity contracted for the third month running in January. French manufacturing increased from December to 48.8 but remained in contraction and the services sector increased mildly to 48.6 from 47.8 in December still shrinking. French Manufacturing is expected to improve to 49.6 and services to 49.5. German Manufacturing is predicted to decline to 56.4, while services sector is expected to climb to 53.4. Finally, the Eurozone manufacturing, is expected to reach 54.2 and services are predicted to advance to 51.93
8. Consumer Confidence: Thursday, 15:00. Euro-area  consumer confidence  improved more than expected in January, climbing to minus 11.7 from minus 13.5 in December indicating positive signs that the currency bloc’s recovery is gathering momentum. Expansion in the Eurozone’s Manufacturing output in January proves the process of recovery is underway. Consumer confidence is expected to improve further to -11.
9. G20 Meetings: Friday. G20 finance ministers and central bank governors will meet in  Sydney Australia the host of February’s meetings. Prime Minister Tony Abbott says Australia’s 2014 chairmanship will structure the global leaders’ discussion around the themes of boosting economic and employment growth, and making the global economy more resilient to deal with future shocks.
10. EU Economic Forecasts: Friday, 10:00. Since 2012, the European Commission publishes three macroeconomic forecasts per year – in the winter, spring and autumn – instead of the usual two editions. This procedure was established to aid EU member states struck by the Eurozone’s economic and financial crisis. The forecasts, focuses on Financial Affairs of Member States in the euro area, but also include outlooks for candidate countries as well as some non-EU countries. In November’s release the forecast revealed signs for an economic recovery in Europe in the third quarter of 2013. The current event will feature panel discussions as well as on and off the record talks with senior members of the EU institutions, representatives of the upcoming Greek Presidency, the ECB and the IMF as well as experts from the think tank and academic communities in Brussels.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with an initial move higher, but was capped by the 1.3650 line (mentioned  last week). It then dropped towards 1.3560 before making another move higher, flirting with the 1.37 line and keeping above 1.3650.

Technical lines from top to bottom:

1.38 is a round number and also worked as a temporary cap during that period of time and also in October 2013. Another round number, 1.37, is another resistance line after capping the pair in December.

1.3650  provided support in December and worked as resistance in September 2013, and is also a significant line. Also the February rally fell short of this line. Below,  1.3560  worked as good support twice during February 2014.

The January 2014 low of 1.3515 provides minor support on the way down. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the downside.

The round number of 1.34 worked as resistance several times in 2013, and is strengthening now.  1.3320  worked as a double top in early September and it was crossed only with a Sunday gap. It remains a clear separator of ranges.

It is closely followed by 1.3295, which was the bottom in November and is part of the broken trend line.  1.3175  capped the pair during July 2013.

1.3100  is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July and providing support in September. Below, 1.3050 is minor support after holding the pair in August 2013.

Long term uptrend support recaptured

A line beginning in the lows of early September that was connected to a line in November gave support to EUR/USD for some time, was broken and then recaptured. A fresh drop proved to be short lived. Will the pair continue trading along this line?

Downtrend support that began in December and was formed in January is getting further away now.

I remain neutral on EUR/USD

Better than expected GDP  certainly supports the euro, and we could get more optimism from ZEW and also upbeat PMIs. In a week without any expected worrying inflation numbers, the euro could gain.  But, on the other hand and despite recent US weakness,  the Fed’s taper train is still on the track. The FOMC meeting minutes could prove this once again.

The failure of EUR/USD to break out of the recent range shows that much more is needed for an upside break out. Downside risks come from another mention of negative rates.  As we’ve seen the euro is very sensitive to such talk.

More:

• Forex Analysis: EUR/USD Rallies to Attempt Bullish Extension
• EUR/USD back above uptrend, targets the 1.3739 level

If you are interested a different way of trading currencies, check out the  weekly binary options setups, including EUR/USD and more.

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.