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EUR/USD  reached out to higher ground, riding on uptrend support, but did not close at the highs.  German Ifo Business Climate, German Retail Sales, and the all-important inflation figures are the main market movers this week. Here is an outlook on the major events and an updated technical analysis for EUR/USD.

The euro already made a nice break to a 6 week high, but could not sustain the gains. Worse than expected  French PMIs,  German sentiment  and attempts to talk down the euro had temporary effects and provided dip buying opportunities. However, the growing notion that the ECB could act while the  Fed isn’t likely to halt tapering  despite weakness in the US eventually limited the gains. The inflation / deflation discussion will reach a climax now. Will EUR/USD make big moves now?  Let’s start,

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

EURUSD Technical Analysis February 24 28 2014 fundamental outlook sentiment forex trading currencies euro dollar

  1. German Ifo Business Climate: Monday, 9:00. Business sentiment in Germany, rose to a 30-month high of 110.6 in January after posting 109.5 in December. The release surpassed economists’ forecast of a 110.2 indicating German economy continues its growth trend. Manufacturers and Wholesalers saw improvement in their current business conditions and were also optimistic regarding future conditions. A further increase to 110.7 is expected now.
  2. Inflation data (final for January): Monday, 10:00. Consumer prices slowed in December despite the European Central Bank’s statement that the euro isn’t facing deflation. Consumer prices climbed 0.8% compared to 0.9% rise in November, distancing from the ECB’s 2.0% inflation target. Meanwhile, core rates excluding volatile items such as food and energy declined to 0.7%, its lowest level since records began in 2001. However, President Jens Weidmann, a key member of the ECB’s governing council remarked there is only a small risk of deflation and the euro area isn’t heading toward a situation like Japan. CPI is expected to gain 0.7%, while core CPI is predicted to rise 0.8%.
  3. GfK German Consumer Climate: Wednesday, 7:00. Consumer sentiment in Germany increased to a six-year high of 8.2 points in February, following 7.7 points in the previous month. German consumers were more confident about domestic conditions hoping a rise in demand as well as global trade will lift Europe’s largest economy and propel the euro zone to faster growth this year. Consumer sentiment is expected to rise to 8.3.
  4. German Prelim CPI (February): Thursday. German Consumer Prices reported a negative growth of 0.6% in January compared to a 0.4% gain in December, worse than the 0.4% decline estimated by analysts and far away from the European Central Bank’s 2% target for the Eurozone after falling a revised 19,000 in December. 0.6%
  5. German Unemployment Change: Thursday, 8:55. German unemployment declined more than expected in January, falling a seasonally adjusted 28,000 amid growing optimism among companies on German economic activity. January’s decline was preceded by a 19,000 decline in December. Analysts expected a smeller decrease of 5,000. The Bundesbank projected expansion will strengthen further in the coming months. A decline of 10,000 unemployed people is expec5ed this time.
  6.    M3 Money Supply: Thursday, 9:00. Euro zone  money supply growth stalled in December rising at an annual pace of 1.0% compared to 1.5% in November. Loans to the private sector contracted further, adding concern about deflation signs in the Eurozone economy. The ECB promised to take action should a deflation risk arise.  After the bank’s policy meeting in January, ECB President Mario Draghi described two scenarios that could trigger fresh policy action: an increase in money market rates that tightens policy by stealth, or a deterioration in the inflation outlook.  Euro zone inflation is running far below the ECB’s target of just under 2%, but the bank choose not to act so far. A small rise to 1.1% is predicted now.
  7. German Retail Sales: Friday, 7:00. German retail sales disappointed shop keepers in December, falling 2.5% after a 0.9% gain in the previous month. The reading was a total surprise to analysts forecast of a 0.2% rise. In annual terms, retail sales declined 2.4% despite the constant improvement in the Job market and consumer sentiment. Nevertheless, Analysts project strong retail sales in 2014 if the labor market and consumer confidence continues to improve. Retail sales are expected to gain 1.2% in January.
  8. French Consumer Spending: Friday, 7:45. French consumer spending contracted 0.1% in December, after posting a 1.4% gain in November. Analysts expected a bigger decline of 0.2%. On a yearly base consumer spending dropped 0.7% following a 0.1% rise in November. Over the fourth quarter, consumption in goods remained stable, after rising 0.2 percent in the third quarter. A further contraction of 0.8% is expected now.
  9. CPI Flash Estimate (February): Friday, 10:00. The euro zone’s consumer price inflation slowed in January gaining 0.7% after a 0.8% rise in December. The reading was weaker than the 0.9% rise projected by analysts. Food, alcohol and tobacco prices increased the most with a 1.7% gain while services increased by 1.1%. Inflation data in the Eurozone is closely monitored by the ECB for monetary policy adjustments. The low levels of inflation may induce the central bank to cut rates in the coming months. Another rose of 0.7% is anticipated now.
  10. Unemployment Rate: Friday, 10:00. The unemployment rate in the Euro-area remained unchanged in December, holding at 12%. Analysts expected a small rise to 12.1%. Eurostat said 26.2 million men and women were unemployed in December, 19 million of whom live in the 18-member region that shares the euro as currency.  The lowest unemployment rate in the EU was Austria’s 4.9%, followed by Germany at 5.1% and Luxembourg at 6.2%.The highest rates were posted by Greece at 27.8% and Spain at 25.8%. Unemployment rate is expected to remain unchanged at 12%.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week struggling with the 1.37 line (mentioned last week). It then surged, peaking at 1.3773 before dropping to uptrend support (described later) and returning to the previous place.

Technical lines from top to bottom:

The 2013 high of 1.3895 is the top line looming above. 1.3830 was a more serious peak that was seen with better volume and was challenged afterwards in 2013.

1.3773 was a cap in February and beforehand in December 2013. The round number of 1.37, is another resistance line after capping the pair in December.

1.3650  provided support in December and worked as resistance in September 2013, and is also a significant line. Also the February rally fell short of this line. Below,  1.3560  worked as good support twice during February 2014.

The January 2014 low of 1.3515 provides minor support on the way down. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the downside.

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 closely followed by 1.3295, which was the bottom in November and is part of the broken trend line.  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. Below, 1.3050 is minor support after holding the pair in August 2013.

Steep uptrend support

Since early February, EUR/USD is riding on a sharp uptrend support line (thick black on the chart). Can it hold on to it?

I turn from  neutral  to bearish on EUR/USD

After ignoring  weak data  day after day, things might change this week, with the all important inflation numbers. The strong euro and the fragile recovery probably led to another poor CPI in Germany and in the euro-zone, and these could trigger  a negative deposit rate in March. The ECB and the euro could certainly come under pressure.

In the US, a downgrade of GDP is already priced in. Despite  all the weakness  in the US,  the Fed is determined to continue tapering.  Technically, the attempt to break out of range to the upside had little success and uptrend support is in jeopardy now.

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