EUR/USD experienced new lows but made a big comeback, riding on USD weakness . In the last full week of the year, we have a busy schedule with PMIs, important German surveys and final inflation data among other events. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.
The second tender of the ECB’s TLTRO fell short of expectations, at just under €130 billion. Together with unimpressive other measures, it seems that QE in the euro-zone is imminent, perhaps already in January. Industrial output and some second tier inflation figures also came short of expectations. However, EUR/USD was saved by the weakness in the US dollar, that retraced the post-NFP gains despite some positive data such as the upbeat retail sales number. What’s next for the pair? Let’s start:Updates:
EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- Bundesbank monthly report: Monday, 11:00. Germany’s central bank provides a monthly report with an assessment of current conditions and future projections for the zone’s No. 1 economy. It will be interesting to see if the gloom appears also here. The German government cut future forecasts not so long ago, and so did the ECB and the EU Commission.
- Flash PMIs: Tuesday: France at 8:00, Germany at 8:30 and the euro-zone at 9:00. The purchasing managers’ indices for November were not too good. The numbers have a strong impact as they are considered forward looking indicators. French manufacturing PMI stood on 48.4 points and services at 48.8. Both figures are below 50 points separating growth and contraction. Both figures are expected to tick up to 48.7 and 48.6 respectively. In Germany, manufacturing slipped to 49.5 points, but services remained in growth territory at 52.1 points. Manufacturing is predicted to return to positive ground with 50.4 and services to advance to 52.6 points. For the whole euro-zone, we had a balanced 50.1 in manufacturing and 51.3 points for services. Also here, improvements to 50.5 and 51.6 points are predicted.
- German ZEW Economic Sentiment: Tuesday, 10:00. After an ongoing deterioration throughout most of the year, this important survey of around 275 analysts and institutional investors emerged from negative ground and returned to optimism with 11.5 points. Is more serious growth on the way? Sentiment is predicted to rise to 19.8 points. The all-European figure carries expectations to jump from 11 to 20.1 points.
- Trade Balance: Tuesday, 10:00. The euro-zone enjoys a surplus in its trade numbers, and this certainly keeps the euro bid. The area enjoyed a positive figure of 17.7 billion in September and is likely to enjoy a similar number for October: 18.2 billion.
- Final CPI: Wednesday, 10:00. The initial numbers for November showed the the rock bottom levels of 0.3% y/y CPI and 0.7% Core CPI. Did they already reflect the sharp drop in oil prices seen in late November? We could see a downgrade in the final figures even if official expectations stand on a confirmation of current numbers. Headline inflation is the “single needle” in the ECB’s compass.
- EU Economic Summit: Thursday and Friday. The leaders of the full European Union (28 countries) meet to discuss current affairs just before the year ends. Youth unemployment is one of the problematic issues, as well as government deficits. Tensions between Germany that drives for austerity and other countries is likely to be seen. An optimistic message about a serious growth could boost the single currency, but this isn’t likely.
- German Ifo Business Climate: Thursday, 9:00. Germany’s No. 1 Think Tank joined ZEW last month with a rise in confidence after long months of declines. The wide survey of 7000 businesses is set to advance from November’s 104.7 points all the way to 105.6. If both IFO and ZEW go in the same direction, it would have a positive impact on the euro.
- German GfK Consumer Climate: Friday, 7:00. Contrary to the previous surveys, this one related to consumers. Here, we also had advances in recent months, and the indicator reached 8.7 points in November. Optimism prevails here as well with a climb to 8.9 points.
- German PPI: Friday, 7:00. Producer prices in Germany have been sliding or stagnating in recent months, even falling behind consumer prices. This secondary measure of inflation dropped by 02% in October, below forecasts, and is expected to slide also now for November by the same scale.
- Current Account: Friday, 9:00. Going hand in hand with the trade balance report, the wider current account figure is also positive. The euro-zone’s surplus, driven by German exports, reached no less than 30 billion euros in September. While this is a late figure, another expansion could still positively impact the euro.
* All times are GMT
EUR/USD Technical Analysis
Euro/dollar kicked off the week with a slide, testing the 1.2250 levels (mentioned last week). From there, it made a nice turnaround and moved all the way towards 1.25 before settling back down in range.
Live chart of EUR/USD:
Technical lines from top to bottom:
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 had various battles around this line, from the topside in October and from the downside in December.
1.2450 is resistance after the pair reached this line in a recovery attempt during December. The round number of 1.24 is now a pivotal line in range. It is followed by 1.2360, which worked as support more than once, including in November 2014. It was a double bottom at one point.
1.2280 joins the chart after it provided support to the pair in December, but it isn’t a strong line. 1.2245 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 broken to the upside
As the thick black line shows, the pair is now trading above downtrend resistance since mid October. Is this a bullish sign? It seems that the battle with this line is not over.
I am neutral on EUR/USD
While the divergent monetary policies are consistent with the long term downtrend, we could see a pause right now. Upbeat German business confidence and some caution from the Fed are likely to prevent extreme lows in the week before Christmas.
In our latest podcast we talk about US jobs, the ECB’s dilemma, a run down of slippery oil and an interesting interview with Itai Furman.
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