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EUR/USD  dropped to lower levels in the last full week of the year as the monetary policy divergence was seen once again. Can it break to lower ground during this week of light Christmas trading?  Here is an outlook for  the highlights of this week and an updated technical analysis for EUR/USD.

While Germany saw better manufacturing PMI and business  confidence, it is becoming clear that January will see the introduction of outright QE, as another comment pointed to that direction. This weighed on the euro. In the US, a relatively balanced FOMC statement was followed by a hawkish Yellen, which sees rate hikes in 2015 and the impact of oil prices as transitory and positive.

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

EURUSD Technical analysis December 22 26 2014 fundamental outlook and sentiment

  1. Consumer Confidence: Monday, 15:00. This official figure by Eurostat disappointed  in October with a fall to -12 points,  reflecting deeper pessimism among the 2300 consumers  surveyed in the euro-zone. A  small tick up to -11  is expected now.
  2. French Consumer Spending: Tuesday, 7:45. The zone’s second largest economy  experienced two consecutive months of declines in consumption, with a drop of  -0.9% in October, worse than a rise expected. The economy is not doing well, to say the least. A small bounce up of 0.2% is likely for November.
  3. Italian CPI: Tuesday, 10:00. The euro area’s third largest country gets special attention this month because it is the first to release inflation numbers for the month of December. We can see how the plunge in oil prices had an impact on Italian consumers. In November, prices dropped by 0.2%, better than expected, if this can be seen as a positive surprise. A rise of 0.2% is expected now.
  4. Belgian NBB Business Climate: Tuesday, 14:00. While coming from a small country, the business indicator from Belgium is a good measure of activity. The figure advanced to -6.1  points in November, but this still reflects pessimism. A tick up to -5.8  is likely now among the ~6000 businesses surveyed here.

Markets are set to grind to a halt on December 24th, Christmas Eve, remain completely closed on Christmas, the  25th and hardly see any activity on the 26th (Boxing Day).

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar  started the week with an initial climb to 1.25 (mentioned last week). It then retreated before another move that saw a challenge of the 1.2570 level. From there it was all downhill, with  a drop under 1.23.

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

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

The general direction remains lower after the ECB is making preparations for QE in January and the Fed made it clear that rate hikes are coming in 2015. Europe needs a lower euro not only for the ECB to reach its headline inflation mandate but also for much needed growth. US citizens received a “tax cut” from oil prices, allowing consumers to spend more. 1.15 in EUR/USD is certainly an option, but perhaps not now.  After  we’ve seen a fall now, the relatively quiet Christmas market may allow markets to take a break before some  fast and  furious end-of-year adjustments in the following week.

In our latest podcast, we run down all aspects of the Fed decision, discuss the running down of oil, the run down Russian ruble and the weak currency down under:

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