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EUR/USD advanced for a third week in a row. As we enter the last month of the year, can it reach new highs? The rate decision is the key event of the week. Here is an outlook for these events among others, and an updated technical analysis for EUR/USD.

Eurozone Flash CPI exceeded expectations rising 0.9%, following 0.7% gain in October. Although the growth rate increased, it remained well below the European Central Bank’s (ECB) inflation target of 2% for nine consecutive months. The lowest inflation in almost four years registered in October is quite likely the reason behind the sudden ECB rate cut seen in November. However, the 0.9% gain eases fears that the euro zone is headed for deflation. Will the ECB come up with further accommodative measures on its December 5 meeting?

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

 EURUSD Technical analysis December 2 6 2013 forex trading currencies fundamental outlook and sentiment

  1. Manufacturing PMIs: Monday. Manufacturing in the euro zone continued to expand in October following an 18-month recession. According to the Markit Manufacturing Purchasing Managers’ Index struggling economies such as Spain and Italy posted growth; Spain registered 50.9 from 50.7 in September while Italy dropped 0.1 points to 50.7 from 50.8 in the previous month but still indicating expansion. Meanwhile, the Eurozone edged up to 51.3 from 51.1 in September following a 26-month high of 51.4 reached in August. The numbers show a possible turning point for the Eurozone economy. Spain is expected to rise to 51.3, Italy is expected to increase to 51.4 and the Eurozone to remain 51.5.
  2. Spanish Unemployment Change: Tuesday, 8:00. Spain’s unemployment continued to rise in October following layoffs of tourist season hires. Despite the relative improvement in economic conditions, unemployment is expected to remain around 25% throughout 2015. The number unemployed edged up by 87,028 people, leaving 4.81 million out of work. The pick-up in Spain’s economy is expected to be mild due to the high unemployment rate which is expected to improve only in the later part of 2014. A rise of 44,300 unemployed is expected.
  3. PPI: Tuesday, 10:00. Producer price inflation in the euro area increased less than expected in September with a mild rise of 0.1%. Economists expected a bigger climb of 0.3%. On a yearly base, producer price index dropped 0.9% in September following 0.8% in August. A drop of 0.1% is expected.
  4. Services PMIs: Wednesday. The Euro area service sector weakened slightly in October. Eurozone  PMI for the services sector, slipped to 51.6 from 52.2 in September, higher than the preliminary reading of 50.9, but still indicating expansion.  Meanwhile, Italian services declined to 50.2 from 52.7 in September and in Spain, services climbed to 49.6 but remained in contraction.  These weak figures led the ECB to cut rates in November to try and boost market activity. Spain is expected to rise to 50.7, Italy to 51.2 and the Eurozone to remain at 50.9.
  5. Retail Sales: Wednesday, 10:00. Euro zone retail sales plunged 0.6% in September, amid fragile economic recovery and persistently high unemployment. This reading ws worse than the 0.3% drop expected by analysts and was followed by a 0.5% rise in August. Domestic demand in the  euro zone  remained subdued after its longest recession since the creation of the euro in 1999.  The European Commission expects a partial rebound in market activity next year, but domestic demand is still fragile. A rise of 0.2% is expected now.
  6. Rate decision : Thursday,  12:45, press conference at 13:30. After the  surprising rate cut in November, the ECB is likely to leave policy unchanged in December. The rate cut has little impact on the economy and with the hindsight of a few weeks, it had no long lasting effect on the exchange rate: the euro is now stronger than before the move. Nevertheless, and despite fear of deflation, another move now would be problematic for the northern block and especially for the Bundesbank. So, Draghi is likely to emphasize that the ECB is considering more moves in the near future, hinting about setting a negative deposit rate already in January. A hint would hurt the euro, and a negative deposit rate would have a much stronger effect on the euro than cutting the lending rate.
  7. French Gov Budget Balance: Friday, 7:45. The French government budget balance narrowed to a seasonally adjusted -80.8 billion in September, from -93.6 billion in the preceding month. France’s credit rating was cut by S&P to AA last month raising antagonism against Hollande’s economic policies. S&P forecasts that French unemployment will remain above 10% through 2016, thanks in part to the country’s exporters losing market share to rivals in Europe with more flexible tax and labor policies.
  8. German Factory Orders: Friday, 11:00. German factory  orders edged up more than estimated in September, jumping 3.3% compared to a 0.3% fall in the previous month. This rise suggests German economy benefits from the gradual recovery in the Euro-area. Economists expected a gain of 0.6%. Orders picked-up 7.9% from a year ago. Despite, downside risks in the Eurozone,. Economists forecast a stronger recovery in 2014. A drop of 0.4% is projected this time.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week with a slide to the round 1.35 line (mentioned last week). It then began a gradual grind higher, settling above 1.3570. It was unable to challenge the 1.3650 line.

Technical lines from top to bottom:

1.3870 capped the pair during the fall of 2011 and served as the “shoulders” in a H&S pattern.  1.38 is a round number and also worked as a temporary cap during that period of time and also in October 2013.

1.3710  was the previous 2013 peak, and served as a clear separator. The pair needed a big trigger to break above this line, and when it lost it again, the fall was painful.

1.3650 temporarily capped the pair during that period of time and is stronger after capping the pair in October 2013. It returns to serve as resistance.  1.3570  is the swing high of September 2013 and also proved itself as resistance quite a few times afterwards. It temporarily stopped the avalanche.

1.35  is a nice round number and was a pivotal line or “magnet” within the previous range. 1.3440 worked as a clear separator in early November 2013 and is a key line to the upside.

The round number of 1.34 worked as resistance several times in 2013, and is strengthening now. 1.3320  worked as a double top in early September and it was crossed only with a Sunday gap. It remains a clear separator of ranges.

It is followed by 1.3240, which capped the pair in April and also had a role in August. It worked as support in September.  1.3175  capped the pair during July 2013.

1.3100  is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July and providing support in September.  It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, but it is less significant now.

Broken downtrend resistance  

We can note (thick black lines on the chart) that the downtrend resistance line from October has been broken. In addition, the moderate uptrend support line starting from September.

I am bearish on EUR/USD

On one hand, the ECB isn’t likely to move again after the surprising rate cut last month and the stronger than expected inflation numbers. However, inflation is still low, money supply is short and the euro is painfully strong for many countries. Draghi could certainly place the “nuclear” option of a negative deposit rate higher on the agenda, hinting about a move in Q1. This could at least allow for a consolidation of recent gains.

On the other side of the Atlantic, the  Fed could still taper in December, especially after it was successful in separating expectations for a rate hike from QE tapering. A strong NFP could certainly boost the greenback.

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