EUR/USD has an exciting week that began with a gradual climb and a sharp downfall, as Draghi dragged down the euro, below last week’s close. Where will the pair go from here? German ZEW Economic Sentiment and Flash PMIs are the main events on our calendar. Here is an outlook on the main market-movers this week.
Following last week’s ECB rate decision, president Mario Draghi hinted on a rate cut possibly at their next meeting after reducing ECB’s forecasts for the euro zone’s economy. The Bundesabnk followed with its own lower forecasts. Draghi,also opened the door for a negative deposit rate. Will these measures help the Eurozone recuperate in 2013? In the US, the headline Non-Farm Payrolls numbers were OK, but probably not enough to stop Ben Bernanke. Let’s Start
Updates: German Trade Balance came in at 15.2 billion euros, lower than the estimate of 15.9B. French Industrial Production declined 0.7%, well below the estimate of a 0.4% gain. Italian Industrial Production also was sluggish, as the indicator fell 1.1%. The estimate stood at -0.2%. Sentix Investor Confidence came in at -16.8 points, below the forecast of -16.2. French Final Non-Farm Payrolls dropped 0.3%, matching the forecast. The Eurogroup is meeting on Tuesday in Brussels. German ZEW Economic Sentiment jumped 6.9 points, crushing the estimate of -11.4. Euro-zone Economic Sentiment also was sharp, moving up 7.6 points. The estimate stood at 0.1 points. The euro continues to test the 1.30 line. EUR/USD was trading at 1.294. German Final CPI came in at -0.1%, matching the forecast. French CPI declined by 0.2%. The estimate stood at 0.0%. Eurozone Industrial Production fell for the second straight month, dropping 1.4%. This markets were expecting a slight gain of 0.3%. There are no scheduled releases on Thursday, but the markets will be keeping on eye on Brussels, which is hosting the EU Economic Summit and the Eurogroup Meetings. The euro has shown some movement following the Fed announcement to introduce Q4. EUR/USD moved as high as 1.30, but has since retracted, and was trading at 1.3074.
- Greek Buyback Announcement: Monday. The deadline for holders of Greek bonds to bid in the buyback program ended on Friday. On Monday, Greek will announce the results of this operation: how much did Greece’s debt load drop. A successful operation is crucial for receiving the next tranche of aid. At first, Greek banks opposed this move, but eventually they seemed to have aligned with their so called “patriotic duty” – they will eventually receive capital injections is necessary.
- French and Italian Industrial Production: Monday. France at 7:45 and Italy at 9:00. French industrial production plunged in September to a three year low, dropping 2.7% as company owners sentiment sharply declined. This reading followed by a 1.9% rise in the previous month, indicating France may be entering recession. Meanwhile Italy continued its downward trend declining 1.5% in September after a temporary rise of 1.7% in August, indicating Italy is in recession.0.4, -0.2
- Sentix Investor Confidence: Monday, 11:30. Sentix investor confidence in the euro zone improved for the third consecutive month, in November rising to -18.8 from 22.2 in October on higher economic situation and the expectations index, despite the sluggish readings in parallel indexes. Economists expected the index to improve to minus 20.0 in November. -16.2
- German ZEW Economic Sentiment: Tuesday, 12:00. Germany’s economic sentiment declined unexpectedly by 4.2 points to -15.7 points in November, lower than the -10 expected by analysts. Current economic situation assessment declined by 4.6 points to 5.4 and economic outlook had scarcely changed in November, down 1.2 points to -2.6. Meanwhile ZEW Economic Sentiment, measuring German investors’ confidence for all of the euro-zone, edged down to -2.6 for November, down from -1.4 in October. -11.4, 0.1%
- Industrial Production: Wednesday, 12:00. Industrial production in the 17-member eurozone dropped more than forecasted in September, down 2.5% from a modest rise of 0.9% in August amid the ongoing sovereign debt crisis. Output decreased in all industry sectors, adding to recession worries.0.3%
- ECB Monthly Bulletin: Thursday, 11:00. The ECB monthly bulletin for November included the bank’s decision to cut growth projections and raise inflation outlook. Contraction rate increased to 0.5% from 0.3% in the previous month and inflation outlook remained above the 2.5% target while estimates stood at 2.3% and next year’s benchmark was raised to 1.9% from 1.7% in October.
- EU Economic Summit: Thursday. Leaders from 27 EU nations gathered to form a long-term budget for the EU, concluded the meetings without reaching agreement. However European Council President Herman Van Rompuy, claimed that constructive discussions held during these meetings should enable an agreement early next year.
- Eurogroup Meetings: Thursday. Finance ministers from 1 member countries in the eurozone will meet to approve the 34.4 billion-euro loan tranche to Greece. Eurogroup chief Jean-Claude Juncker will conclude his role at the end of this year, but the main Europgroup partners failed to reach an agreement for his replacement.
- Flash PMI’s: Friday. November was another bad month for the Eurozone economy leading to its weakest quarter since 2009 recession. Eurozone’s flash service sector PMI dropped to 45.7, posting the lowest reading since July 2009, below predictions of a 46.1 reading, below the 50 point mark indicating contraction. Service sector in Germany, the largest euro zone nation contracted to 48 from 48.4 in October, weakening as the rest of the Euro members. French service PMI increased modestly to 46.1 from 44.6 but still indicating a slowdown. Likewise the Eurozone manufacturing PMI edged up to 46.2, from 45.4 in October but still signaling steep rates of decline. French Purchasing Manager’s Index in manufacturing increased to 44.7 from 43.7 in October, while French manufacturing sector improved to 44.7, compared to 43.7 recorded October, but still indicating recession is here to stay. A modest improvement is expected in the Eurozone, Frane and Germany; French Manufacturing PMI is expected to reach 44.9, the eurozone 46.6. Service sector is expected to show gains in France 45.8, Germany 50, and the eurozone 47.
- Inflation data: Friday, 12:00. The annual inflation rate in the 17-nation Eurozone edged down to 2.5%, in line with estimations from 2.6% in September. ECB President Mario Draghi said inflation risks are “very low”. Meanwhile core inflation is also on a downside trend as the recession spreads to additional countries. The core inflation rate, excluding volatile costs such as energy, alcohol and tobacco, reached at 1.5% in October. Following the same reading in the previous month. CPI is expected to reach 2.2% while Core CPI is forecasted to gain 1.5%.
*All times are GMT.
EUR/USD Technical Analysis
€/$ began the week with a nice climb toward the 1.3080 line (mentioned last week), which worked perfectly well for the first time. A second attempt already reached 1.3126 before the pair started retreating. It then collapsed, hung on to 1.2960 at first, and then free fell, finding support only at 1.2880 before closing at 1.2926.
Technical lines from top to bottom:
1.34 was a stubborn cap during the spring of 2012 and is the far line in the distance. Below, 1.3290 served as resistance before the pair collapsed in May.
1.3170 worked very well as a double top during September 2012 and is now the top frontier of the range. A failure to get closer to this line shows that the pair has limited momentum. 1.3130 proved to be strong resistance during December 2012.
1.3080 capped the pair in September and then again in October and December. 1.3030 provided some support at the same period of time, and also at the end of November 2012. Both are minor in comparison with the next line.
The very round 1.30 line was a tough line of resistance for the September rally. In addition to being a round number, it also served as strong support. It recently worked as a battleground and the pair is now ready for another battle around this line. It is closely followed by 1.2960 which provided some support at the beginning of the year and also in September and October – the line is strengthening once again after temporarily cushioning the fall during December.
1.2880 provided some support in October and also in late November and December. It proved to be a backstop on the initial false rally after Obama’s victory. 1.28 is the bottom border of the range, and was eventually left behind. The pair fell to this low in September and later got close to it.
1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now a pivotal line in the range. 1.2690 was the new low after the November breakdown, and also provided support on a second downfall attempt in November 2012.
1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.
Below, the round number of 1.25 is not only of high psychological significance (USDEUR 0.80) but also worked as support during the summer of 2012. 1.2440 is already a stronger line, that was a clear separator during August.
Below, 1.2390 was resistance in July. 1.2250 is lower support, also at that time.
Long Term Downtrend Resistance Weakening
The line extending from the 2011 peak of 1.4940 (a green line on the chart) was breached during the first week of December, but is in play once again. It is weaker now.
Narrowing Channel Broken Again
Euro/dollar broke below the old narrowing channel that once dominated its range trading (black lines).
I turn from bearish to neutral on EUR/USD
The economic situation in the euro-zone is clearly worsening, and this includes the three biggest countries: Italy, France and Germany – as the recent Bundesbank forecasts show. And while Greece has been saved again, its return to GDP levels last seen in 2001 and an unemployment rate of 26% mean that it will probably need debt restructuring. Even Angela Merkel knows that Germany will pay the price, and she wants to delay it is much as possible.
However, the Federal Reserve can see the empty part of the glass regarding the US economy: despite strong job gains and stronger Q3 growth, the wider unemployment picture is damp, and here are 4 reasons to worry about growth. The Fed could easily introduce more monetary easing (QE4 / QE Infinity 2). So, in the ugly contest between the euro and the dollar, we could see a tie this week. The fiscal cliff talks could be a wildcard, but currently not much is happening.
More fresh technical analysis
- EUR/JPY Pulls Back from Resistance within Steep Bullish Trend – by James Chen.
- EUR/USD: Larger Trend Is Up (Elliott Wave Analysis)
If you have interest in 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