EUR/USD Forecast Feb 25 – Mar 1

EUR/USD had a negative week, breaking down in a head & shoulders pattern as the dollar enjoyed the hawkish FOMC meeting minutes. Italian parliamentary elections, German retail sales and employment data are the major events this week. Here is an outlook on the main market-movers ahead and an updated technical analysis for EUR/USD.

Last week, promising figures were released from Germany; the important German ZEW Economic Sentiment jumped up from 31.5 to 48.2 points and IFO also leaped to 107.4, both above expectations.  German Flash Manufacturing PMI switched to expansion, reaching 50.1. However, the rest of the euro-zone is still struggling, with negative PMIs. In addition, the EU Commission painted a rather gloomy picture for 2013. In the US, the FOMC minutes revealed a lively debate regarding unwinding some QE, a move that certainly helped the greenback. Will this trend continue now that the pair is under uptrend support?

Updates: Italian elections provide a huge drama. EUR/USD rose on expectations that pro-reform Bersani and Monti will win. The first exit polls showed this result – a good outcome for Bersani and somewhat weaker for Monti. EUR/USD remained just under 1.33 and only slightly sold the fact. However, new data showed something totally different: Berlusconi could win the Senate, and Bersani could win the lower house. Grillo probably got more than 25% and not 19% as previously thought. These worries sent EUR/USD crashing down. A hung parliament or a victory for Berlusconi can send the pair to 1.30, as aforementioned. German Buba President Weidmann spoke in Paris. The election results in Italy were a major surprise, with Grillo picking up more votes than any other single party. With the results pointing to a hung parliament, a new election remains a possibility. PM Monte did poorly at the polls, as voters vented their frustration at the strict austerity measures Monti had imposed. The markets were jittery over the political deadlock in Italy, as politicians scramble to make sense of the results. With political deadlock gripping Italy, the euro took a tumble. EUR/USD is losing ground, and has again dropped below the 1.31 line. EUR/USD was trading at 1.3160. GfK German Consumer Climate came in at 5.9 points, matching the estimate. German Import Prices rose 0.1%, missing the estimate of 0.5%. M3 Money Supply increased by 3.2%, beating the forecast of 3.2%. Private Loans slumped by 0.9%, missing the estimate of -0.6%. Retail PMI came in at 44.5 points. The index has not cracked the 50-point level since October 2011. The Italian 10-year bond auction went well, but yields rose to 4.83%, compared to the previous yield of 4.17%. ECB President Mario Draghi spoke in Bayern. German Preliminary CPI came in at 0.6%, just under the estimate of 0.7%. French Consumer Spending dipped 0.8%, well below the estimate of -0.1%. German Unemployment Change dropped by three thousand. The  estimate stood at -5K. Eurozone CPI came in at 0.2%, matching the forecast. Eurozone Core CPI rose 1.3%, missing the estimate of 1.5%. The euro remains under pressure, as EUR/USD was trading at 1.3114.

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

1. Italian Parliamentary Election: Sun-Mon The euro-zone’s third largest economy goes to the polls on Sunday and Monday. Results are expected Monday at 15:00. There is a close race between current center-leaning PM Mario Monti, center left leader Pier-Luigi Bersani, center-right PM Silvio Berlusconi and also the  alternative candidate Beppe Grillo of the 5 Star Movement. There are fears that Berlusconi will eventually fare very well, and could return to his former job. Another fear is that Italy will have a hung parliament. The best scenario for the markets is a strong outcome for Bersani and Monti, that would form a government together and continue the current policy. Last moment efforts to win over undecided voters compelled former prime minister Silvio Berlusconi to offer easing measures in IMU housing tax as well as remission on penalties for tax evaders. These attempts were strongly criticized by other opponents such as the former Prime Minister Mario Monti, who introduced the IMU tax to battle the debt crisis left behind by Berlusconi’s government..
2. GfK German Consumer Climate: Wednesday, 7:00. Consumer spirits in Germany recovered in February following a modest rise to 5.8 from January’s upwardly revised 5.7 (5.6). It is expected that the current slowdown will not last for long. Germany will continue to advance steadily in 2013 according to Bundesbank President Jens Weidmann. A further increase to 5.9 is anticipated.
3. German Import Prices: Wednesday, 7:00. Germany’s import price declined more-than-expected in the 4^th quarter, down 0.5% from a 0.2% drop in the third quarter. Analysts expected German Import Price to fall to -0.1%. A rise of 0.5% is expected now.
4. M3 Money Supply: Wednesday, 9:00. Euro zone  M3 money supply – increased at an annual pace of 3.3% in December, lower than the 3.8% achieved in November and just below market predictions of 3.9%.  An increase of 3.2% is forecasted.
5. Retail PMI: Wednesday, 9:10. Markit’s Eurozone retail PMI registered a fifteenth consecutive month-on-month contraction in sales values, despite promising retail figures form Germany. The Euro-zone’s PMI increased to 45.9 in January from 44.5 in December indicating a sharp reduction in sales at the Eurozone.  
6. German  CPI  : Thursday. German preliminary Consumer Price Index in January declined 0.5% after increasing 0.9% in last month. The reading was in line with market expectations. On a yearly basis,  German  inflation increased 1.7% in this month. The lower than expected inflation reading suggests the euro area still faces fundamental hardships such as the ongoing debt crisis distancing its recovery. An increase of 0.7% is expected this time.
7. French Consumer Spending: Thursday, 7:45. French consumer spending calmed in December remained flat, amid lower energy prices offsetting the surge in car sales. However a small improvement was noted during the holiday season. This reading followed a 0.2% rise in the previous month. During the fourth quarter consumer spending declined 0.1% from the third quarter. A decline of 0.1% is fortecasted.
8. German Unemployment Change: Thursday, 8:55. German   unemployment  contracted more than estimated in January falling by a seasonally adjusted 16,000 to 2.916 million. This reading followed a 2,000 drop in December,  pushing the jobless rate down to 6.8%. Economists expected a rise of 9,000. A further decline of 5,000 is expected now.
9. Inflation data:   Thursday, 10:00. The yearly inflation rate in the 17 countries sharing the euro reached 2.2% in December, unchanged from November. The holiday spree was a good opportunity both for retailers and service providers to pass on some price rises to consumers. Despite the recession mode, high energy prices kept inflation above the ECB’s target of 2.0%, but inflation is getting closer to this in recent months. Excluding volatile items such as food and energy, core rate of inflation climbed to 1.5% from 1.4% in November. CPI is expected to gain 2.0%, while core CPI is predicted to climb 1.5%.
10. German Retail Sales: Friday, 7:00. German retail sales dropped 1.7% in December. This was the biggest decline in three years lowering hopes that consumer spending will boost Germany’s economy. Economists expected retail sales to gain 0.1%. A gain of 1.1% is expected.
11. Manufacturing PMIs: Friday. The final  Eurozone manufacturing PMI  edged up to an 11-month high of 47.9  in January, from both the preliminary reading of 47.5 and the previous month’s reading of 46.1 points. The overall Eurozone manufacturing was still subdued at the beginning of 2013 despite rises in Germany, the Netherlands and Ireland indicating there is a wide disparity between the performances of the member nations. In Spain, Purchasing Managers’ Index rose to 46.1 points in November following 43.5 in October. It is a long recession for Spain, whose manufacturing sector was in contraction for almost two years. Higher exports are the only optimistic factor for the sector. Spanish domestic economy is required to make extensive changes a real recovery commences. Italy’s manufacturing PMI also increased in January, picking up from 46.7 to 47.8, a bit higher than expected. Spain is expected to reach 46.3,   Italy is forecast to decline to 47.6 and the Euro-zone is expected to remain 47.8.
12. CPI Flash Estimate: Friday, 10:00. The Eurozone annual inflation is expected to decline to 2.0% in January 2013, down from 2.2% in December 2012, reaching the European Central Bank’s (ECB) medium-term target. This reading was the lowest level since 1.9% in November 2010. A rise of 2.0% is forecast  this time.
13. Unemployment Rate: Friday, 10:00. Unemployment across the Eurozone became stable in December remaining at 11.7%. However despite the improvement in  However, the latest EU data still showed almost 19 million people without work in jobless rate, Eurozone labor market will continue to struggle in the coming months. A small rise to 11.8% is forecast.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week  trading  below the 1.34 line (mentioned last week). After a temporary false break, the pair began a huge descent. Attempts to recover were countered at the 1.3255 line. EUR/USD barely managed to close above the lows, at 1.3191.

Technical lines from top to bottom:

We start from lower ground this time. 1.3860 was a stubborn peak in the autumn of 2011 and is a key high line. 1.3740 was a swing high at the same period and is a minor line now.

1.3690 worked as support during the aforementioned period and is another minor line. 1.3588 worked as a clear separator of ranges during January 2013 and proved to work as resistance in February.

1.3486 was the peak seen in February 2012 and is a separator of ranges. An attempt to break higher eventually failed. 1.34 was a stubborn cap during the spring of 2012 and continued its stubborn stance in January 2013 – the line now turns into resistance. These are the head and shoulders lines.

1.3350 was a peak in January 2013 and worked very nicely as support during February. The line is weaker now. Below, 1.3290 served as resistance before the pair collapsed in May, After many failures to break higher, the euro finally pushed through.

1.3255 provided support during January 2013 and also beforehand. A recovery attempt failed to reconquer this line. This is the bottom of the previous range. 1.3170, which was the peak of September, served as support for the pair after the break in December and is a key line on the downside. A break below this line wasn’t confirmed. This is the key line now.

1.3130 proved to be strong resistance during December 2012 and now switches positions to support.  1.3110 is a minor line after working as temporary resistance in December 2012.

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. In January 2013 it served as the last line of support, at least for now.

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.

Lower, 1.2880 worked in both directions during 2012 and was the beginning of the uptrend support line. Lower, 1.2805 was the bottom border of the wide 1.2805-1.3170 that characterized the pair’s trading for a long time.

Uptrend support clearly broken.

After sliding within the channel (thick black lines), EUR/USD made a clear breakdown and could not get back in. The channel accompanied the pair since December 2012 and was briefly broken to the upside.

I remain bearish on EUR/USD

The elections in Italy have a huge potential to disappoint markets either via a swing towards Berlusconi, or via a swing towards the alternative candidate Beppe Grillo, which amassed a huge crowd of supporters. A result that upsets markets could send the pair to 1.30 quite easily. In addition, the real economy, at least outside Germany, continues struggling in a deep recession, and everybody knows that. While things aren’t that shiny in the US, it still experiences growth and markets still believe that the Fed might begin tightening, despite the dovish control.

More technical analysis:  –  EUR/USD Head-and-Shoulders Pattern Breakdown –  by James Chen.

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