Euro/dollar had a terrible week, as it reached fresh 2 year lows losing nearly 400 pips. After the optimism from the EU Summit was totally erased, the euro-zone finance ministers will try to make some progress on Greece and Spain, but the hurdles continue mounting. There are quite a few other events scheduled. Here is an outlook for the upcoming events and an updated technical analysis for EUR/USD.
The ECB not only cut the benchmark lending rate to a new historic low, but also eliminated the deposit rate and admitted that the situation is worse than expected. In the debt crisis front, things aren’t looking rosy in the week after the summit: Finland and the Netherlands oppose bond buying by the ESM, Greece is even worse off than expected and the solution for Spanish banks is not close at all. On this background, the euro will find it hard to recover.
Updates: The trading week kicked off with some disappointing releases. German Trade Balance posted a reading of 15.0 billion, below the market estimate of 15.7B. Sentix Investor Confidence continued to drop, coming in a -29.6 points. It was the indicator’s worst reading in over three years. Spanish 10-year yields climbed above the psychologically important 7% level, reaching a high of 7.1%. The markets will be closely following remarks by ECB head Mario Daraghi, as he address the European Parliament on Monday. The Euro-zone finance ministers will als0 be meeting in Brussels to discuss proposals announced at the EU Summit to help struggling members and integrate banking systems. The euro has edged upwards, pushing above the 1.23 line. EUR/USD was trading at 1.2303. French Industrial Production declined 1.9%, a very poor reading. The markets had forecast a smaller decline of 0.9%. Italian Industrial Production looked sharp. The indicator jumped 0.8%, easily exceeding the -0.3% estimate. At the Eurogroup meeting of finance ministers, there was little progress to report. However, an agreement was reached to extend Spain’s deadline to reach budget targets to 2014, and set the parameters of the bailout package for Spanish banks. The euro is testing the 1.23 line in choppy trading, as EUR/USD was trading at 1.2306. The only Euro-Zone data on Wednesday was the 10 year German Bond Auction. The treasury sold EUR 4.15 billion in 10-year bonds at an average yield of 1.31%, a record low, as investors sought safety in German bunds. At the Eurogroup meeting of EU finance ministers ended with little progress to report. No agreement was reached on the use of rescue funds to intervene in bond markets and lower Spain and Italy’s borrowing costs,which are threatening to spiral out of control. The finance ministers did agreed to extend Spain’s deadline to reach budget targets to 2014, and stated that EUR 30 billion in aid would be made available to Spanish banks by the end of July. The euro remains below the 1.23 line, as EUR/USD was trading at 1.2280. French CPI showed no change, which was a notch better than the market forecast of 0.1%. German WPI came in at -1.1%, well below the estimate of -0.5%. The ECB Monthly Bulletin was released on Thursday. The markets received good news from the Euro-zone Industrial Production. The indicator jumped by 0.6%, well above the market forecast of 0.0%.ECB President Mario Draghi will be addressing a conference in Casablanca. The markets were disappointed by the news that the Federal Reserve had no immediate stimulus plans. Minutes of the Fed’s June policy meeting indicated that Fed would continue to stand on the sidelines and not take any significant monetary measures to bolster the US economy. Bowing to pressure from the EU, the Spanish government implemented an austerity program, which included a raise in the sales tax and a reduction in unemployment benefits. The euro continues to drop following the news from the Fed, as EUR/USD crossed below the 1.22 line. The pair was trading at 1.2178.
EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- Eurogroup meeting: Monday. The foreign ministers of the euro-zone countries will convene in Brussels and they have a lot on their agenda: the aid request from Cyprus, the details of Spain’s aid request and a possible renegotiation of Greece’s bailout terms. Regarding Spain, the EU Summit stated that the decisions regarding bond buying by the bailout fund and the banking supervision will be implemented on July 9th. This will not happen now, and will add a lot of stress. Spain recently paid a dear price for borrowing in the markets.
- German Trade Balance: Monday, 6:00. The euro-zone’s powerhouse enjoys a huge trade balance surplus, which more than covers for the deficit of all the rest. Last month, this surplus rose to 16.1 billion euros. A similar number is expected now: 15.9 billion.
- Mario Draghi talks: Monday, 12:30. The president of the ECB will have another chance to detail on the current economic situation after he acknowledged that “downside risks have materialized“. Many expect Draghi to offer some help via the bond buying SMP program, which is not active for many months.
- Sentix Investor Confidence: Monday, 8:00. This survey of 2000 analysts and investors deteriorated in the past three months and reached -28.9 points which reflects significant pessimism. A small improvement is predicted now: -26 points.
- French Industrial Production: Tuesday, 6:45. Europe’s No. 2 economy saw a nice rise of 1.5% in its industrial output last month. A drop of 0.9% is awaited.
- German Final CPI: Wednesday, 6:00. The level of German inflation is a key factor in the ECB’s rate considerations. The initial estimation showed a drop of 0.1% in prices. The final figure will probably confirm the initial read – confirming two months of price drops.
- French CPI: Thursday, 6:45. Europe’s second largest country will probably follow Germany and see another month of drops in prices: -0.1%. The drop in commodity prices also contributes to this.
- ECB Monthly Bulletin: Thursday, 8:00. One week after the all-important rate cut decision by Mario Draghi, the ECB will release the data it used for making its decision. This can show us how bad things are according to policymakers.
- Industrial Production: Thursday, 9:00. Following the lead of France and Germany, the figure for the whole euro-zone will be published. No change is expected after last month’s 0.8% fall and a slide of 0.1% beforehand.
- Draghi talks again: Thursday, 17:00. This speech in Casablanca is seemingly less important than the testimony earlier in the week, but Draghi will have another chance to react and move market, this time after the Eurogroup.
* All times are GMT
EUR/USD Technical Analysis
€/$ started the week with a failed attempt to cross the 1.2670 line (mentioned last week). It then gradually slid lower finding support above 1.25 before the big fall. The pair then traded in a narrow range between 1.2360 to 1.24 before plunging lower and dipping temporarily under the previous 2012 low of 1.2288, closing very close to this point – at 1.2286. The new low of 1.2260 should be watched as well.
Technical lines from top to bottom:
We start from lower ground this week. 1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now of higher importance. 1.2670 was a double bottom during January and was the high line of the recovery before the Greek elections in June. It also capped the pair at the beginning of July 2012.
1.2623 is the previous 2012 low and remains important despite recent battles over this line. Below, 1.2587 is a clear bottom on the weekly charts but is only a minor line now.
1.2520 had an important role in holding the pair during June, in more than one case, but it’s much weaker now. 1.2440 provided support for the pair at the same time. and worked as double bottom.
It is closely followed by 1.24 that provided some resistance in June 2010 and switched to resistance in July. 1.2360 was temporary support in July 2012 but quickly switched to resistance.
Further below, 1.2330 is another historical line after being the trough following the global financial meltdown in 2008. The now previous 2012 low of 1.2288 is of higher importance now after being reached twice.
1.22 is minor support below, after serving as such in June 2010. 1.2144 is already a very strong line on the downside: it was a clear separator two years ago, when Greece received its first bailout.
Next we have the 1.20 line, which is a round psychological figure. The post crisis low of 1.1876 is the final frontier before lines last seen in the good years.
I am bearish on EUR/USD
Apart from the deepening recession to which the ECB reacted, the debt crisis is getting worse, with the holes in the EU Summit now materializing as well: a solution for Spanish banks could take a year from now, the Netherlands and Finland object direct bond buying with the latter hinting that it will not stay in the euro-zone. This adds pressure on Spain and Italy. And after some calm from Greece, the dire economic situation clearly points to a big compromise in the bailout terms (something that Germany objects) or the dreaded Grexit.
In the US, job growth is weak enough to show that the US will not lead the world to growth, but isn’t weak enough for QE3. This balance is favorable for the US dollar as a safe haven from trouble, yet with a currency that isn’t suffering additional devaluation.
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