EUR/USD Forecast August 4-8

EUR/USD  had another negative week, surrendering to the greenback’s strength but recovering quite nicely at the end of the week. The highlight of the week is clearly the ECB decision. Will Draghi try to push the euro even lower? In addition, we have more PMIs and some German data.  Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.

Euro-zone inflation  fell even deeper, to 0.4% in July and this weighs on the euro. On the other hand, unemployment is falling across the  continent (11.5%) and consumption is on the rise, at least in core countries. In the US, the  excellent GDP growth of 4%  in Q2 (annualized)  as well as higher expectations for monetary tightening (despite a  not-too hawkish Fed statement) boosted the dollar across the board. The  unimpressive NFP at +209K  hurt the dollar, but it wasn’t a huge disaster. Will this free fall continue?

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

1. Spanish Unemployment Change: Monday, 7:00. The number of unemployed people in Spain declined by 122,684 in June, following a 111.900 decline in the previous month.   The 6.59% fall lowered the total number of unemployed to 4.44 million. The number of people out of work in the country plunged by 251,637 from January to June, indicating an ongoing improvement in the Spanish labor force.
2. Sentix Investor Confidence: Monday, 8:30. Eurozone investor climate edged up to 10.1 after posting 8.5 in June. The major improvement was registered in economic expectations following the ECB rate cut. Economists expected a lower score of 7.5. The current conditions index moved up strongly to 2.3 from 0.3. Eurozone investor confidence is expected to reach 9.1.
3. PPI: Monday, 9:00. Producer price inflation in the euro zone declined by 0.1% in May following the same drop in the prior month. This was the fifth consecutive decline raising concerns over deflation. On a yearly base, the producer price index plunged 1% in May, in line with market forecasts and following a 1.2% slide in April. Producer prices are predicted to remain unchanged.
4. Services PMIs: Tuesday. The private sector in the Euro-area saw solid growth in June, reaching the best quarter of economic expansion in the region for three years. Business activity in the French service sector declined for the second straight month in June posting 48.2 from 49.1 in May. The decline was driven by a reduction in new business. Italian service sector expanded at the fastest pace in almost seven years, marking 53.9 from 51.6 in May with the rise in new business. Growth in Spain remained strong in June, despite minor falls in the second straight month. These upbeat readings suggest a stronger GDP rise in the second quarter. Spanish private sector is expected to rise to 55.1, Italian services sector is expected to reach 53.2 and the Eurozone services sector is expected to remain at 54.4.
5. Retail Sales: Tuesday, 9:00. Retail sales across the Eurozone remained flat in May, despite expectations for a 0.3% rise. High unemployment was the main reason behind the stagnation in sales. Retail sales did not yet benefit from the European Central Bank’s rate cut announced in June and are expected to grow mildly in the second quarter. Retail sales in the Euro area are expected to rise 0.4%.
6. German Factory Orders: Wednesday, 6:00. German factory  orders declined more than expected in May, down 1.7% from a 3.4% rise in April, amid geopolitical tensions. Economists expected a smaller drop of 0.8%. Tensions between Russia and Ukraine have increased uncertainty, but Germany remains the main driving force for the Eurozone’ recovery. German factory  orders are expected to rise by 0.5% this time.
7. Italian Prelim GDP: Wednesday, 8:00. The Italian economy contracted 0.1% in the first quarter before industrial production rebounded in April. The final figure was in line with the preliminary reading released on May 15. High unemployment rate remains the biggest concern of Prime Minister Matteo Renzi, seeking a return to growth after two years of recession. However industrial output  edged up in April to the highest level since October 2013 suggesting a stronger GDP reading in the second quarter. Italian growth rate is expected to reach 0.1% in the second quarter.
8. German Industrial Production: Thursday, 6:00.  German industrial production declined 1.8% in May, contrary to predictions for a 0.3% rise. This was the third consecutive drop suggesting Europe’s “locomotive” is losing steam amid weaker business activity with China and Russia. Mixed signals from recent data suggest a growth rate in the second quarter. German industrial production  is expected to gain1.4%.
9. Eurozone rate decision: Thursday, 11:45. The European Central Bank kept its monetary policy unchanged in July, waiting to see the effects of the measures it enacted a month ago. Interest rates remained intact and the ECB’s inflation expectations remained low. The only novelty was Draghi’s announcement that, as of January, the Governing Council would begin holding monetary policy meetings once every six weeks, instead of monthly, and that it would publish minutes of its meetings. The ECB is not expected to change rates this time.
10. German Trade Balance: Friday, 6:00. Germany’s trade surplus widened in May to a total of 92.8 billion euros, amid lower imports. Imports declined by 3.4% to 74.1 billion euros. The balance between imports and exports increased to 18.8 billion euros in May from 17.2 billion euros in April. Germany’s trade surplus is expected to reach19.8 billion this time.
11. French Industrial Production: Friday, 6:45. Industrial production in France weakened considerably in May plunging 1.7% from a 0.3% gain registered in the previous month. Analysts expected a 0.5% rise. On a quarterly basis, manufacturing production fell 0.9% over the last three month while on a yearly base, manufacturing output dropped 0.7% in May, again mainly in the manufacture of electrical and electronic equipment and machine equipment. Industrial production  is expected to grow by 1.1%.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar  started the week with a failed attempt to break above the 1.3450 line (mentioned  last week). It then fell to fresh 8 month lows and found it hard to reconquer the lost 1.34 level.

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

Technical lines from top to bottom:

The round number of 1.37, is another support line after capping the pair in December yet it is weakening. 1.3677 was the peak in June so far, and could turn into important resistance.

1.3650  worked as strong resistance during May and June but is weakening now.  1.3585  served as the bottom of the range and still carries weight despite the breakdown in June. 1.3550 worked as support in January  but is now weakening.

The round number of  1.35  worked as the last cushion in June and is strong also due to the roundness. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the upside.

The round number of 1.34 was last seen in December as a stepping stone for the pair on its way down. Below, the next line of support is only at 1.3325, a level that separated ranges back in September 2013.

1.3295 is the next line: it was the low level in November. Below this line the round number of 1.32 is the important due to its role in August 2013.

Narrowing downtrend channel

As the thick black lines on the chart show, the pair is trading within two downtrend lines in recent months.  Downtrend resistance, that begins from the near 1.40 peak and was  mentioned here before is quite far from the line at the moment. Downtrend support accompanies the pair from May and was formed in  June. It is quite close.

I remain  bearish on  EUR/USD

Despite a weaker value of the euro,  inflation remains too far  from the ECB’s target. And while it takes time for  June’s wide measures  to kick in, Draghi may decide not to wait and  try to talk the euro down in various ways, as that would certainly help in achieving his mission. In the US, the  excellent data  that we’ve received is likely to keep the dollar bid for quite some time, even if we still don’t have a clear idea of when the US rate hike actually happens.

Some  EUR/USD related videos:

• Why the dollar corrected on the Fed [Videos]
• State of the German economy  – interview on Dukascopy TV

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.