EUR/USD had another fantastic week, reaching 14 month highs. Will it stop for consolidation at this point or sail towards 1.40? The Euro-zone rate decision is the main highlight of the week. Will Draghi warn about the exchange rate? Here is an outlook on the main market-movers ahead.
The feeling that the “worst is over” regarding the debt crisis continues to send money into the euro-zone, and lifts the value of the euro. Retail sales from Germany, the euro-zone’s locomotive, disappointed with a drop of 1.7%. Meanwhile, manufacturing PMIs improved in Spain and the Euro-zone but still remained in recession. Will the Euro-zone stabilize during 2013 in line with predictions? The drop in the unemployment rate is a positive sign, but many more are needed.
Updates: Spanish Unemployment Change was up sharply to 132.1K, but still beat the forecast of 150.0K. Eurozone Sentix Investor Confidence disappointed, dropping 3.9 points. The markets had expected a smaller decline of 2.2 points. Eurozone PPI declined 0.2%, matching the estimate. Spanish Services PMI improved nicely, climbing to 47.0 points. This was well above the estimate of 44.7 points. Italian Services PMI came in at 43.9 points, missing the estimate of 45.9 points. Eurozone Final Services improved to 48.6 points, just above the forecast of 48.3 points. Eurozone Retail Sales was weak, declining 0.8%. The estimate stood at -0.5%. Italian Preliminary CPI gained a modest 0.2%, matching the forecast. The euro continues to show volatility, as EUR/USD was trading at 1.3529. German Factory Orders rose 0.8%, exactly as expected. French Trade Balance looked weak as the deficit widened to -5.3 billion euros. The estimate stood at -4.2 billion. Thursday is Day 1 of the EU Economic Summit. French 10-year bonds posted an average yield of 2.30%. This was higher than the yield at the previous auction, of 2.07%. German Industrial Production rose a modest 0.3%, beating the estimate of 0.2%. As expected, the ECB maintained its benchmark interest rate at 0.75%. ECB head Mario Draghi will speak at a press conference later on Thursday. EUR/USD was trading at 1.3546.
- Spanish employment data: Monday, 8:00. The number of people registered as unemployed in Spain dropped unexpectedly by 59,094 in December following 74,300 rise in November. The reading beat predictions for another increase of 50,300 unemployed. In 2012, some 426,000 people joined the unemployed ranks, an increase of 9.6% on 2011. Spain is expected to add 150,000 jobs this time.
- Sentix Investor Confidence: Monday, 9:30. Eurozone investor sentiment improved considerably in January, reaching -7 from -16.8 in December. The reading was way above predictions indicating a modest trend of optimism. A major improvement to minus 2.2 is forecasted.
- PPI: Monday, 10:00. The Euro-zone producer prices index dropped 0.2% in November, a bit worse than the 0.1% decline expected, following October’s 0.1% increase. Producer prices were 2.1% higher than November 2011. Another 0.2% decline is anticipated.
- Services PMIs: Tuesday. The Eurozone services sector marked the eleventh consecutive month of contraction in December maintaining the reading from the previous month, reaching 47.8 amid decline in new orders. France, Italy and Spain all remained in recession, with a small improvement in December. Spain’s services sector marked a year and a half of declining activity in December with a small improvement to 44.3 from 42.4 and Italy registered 45.6 reading in December from 44.6 in November closing 2012 with a pessimistic note. Spanish Manufacturing PMI is expected to reach 44.7, Italian – 45.9 and the Euro-zone – 48.3. Manufacturing PMIs were a positive surprise.
- Retail Sales: Tuesday, 10:00. Euro-zone retail sales improved slightly in December rising 0.1%, from a 0.7% decline in November; however the increase was lower than the 0.3% rise anticipated. On a yearly base, retail sales were 2.6% lower than November 2011. However the ECB forecasts the Euro-zone will stabilize in 2013. A drop of 0.5% is expected this time.
- German Factory Orders: Wednesday, 11:00. German factory orders dropped more than expected in November, down 1.8% from a 3.8% rise in October, amid weak demand from global markets outside the euro area. Economists forecasted a 1.4% decline. Nevertheless Germany’s economy has shown some signs of stabilization in recent weeks, with improvement in the labor market and consumers’ confidence. A 0.8% gain is forecasted.
- French Trade Balance: Thursday, 7:45. France reduced its trade deficit in November to 4.3 billion euros, following 4.7bn euros in October, better than the 4.8bn deficit expected by analysts. The ongoing deficit reflects the lack of competitive position of French industry and services. Another deficit reduction to 4.2 billion is forecasted.
- German Industrial Production: Thursday, 11:00. German industrial output increased less than predicted in November rising 0.2% after a 2.0% plunge in the previous month, amid a sharp drop in energy and consumer goods production a sign of contraction in Germanys industrial sector in the fourth quarter. Nonetheless, German manufacturing output remains relatively strong compared to euro zone countries such as Greece, where it fell by 2.9 percent on the year in November. A rose of 0.2% is expected now.
- Rate decision and press conference: Thursday, 12:45. Thursday, 12:45, press conference at 13:30. The European Central Bank is not expected to make any change in policy. The previous meeting saw a significant shift from hinting about an upcoming rate cut to a unanimous decision against it. Making another big shift in either direction now could hurt the ECB’s credibility. Draghi is expected to reiterate the improving situation in the financial markets, now accompanied with better business sentiment in Germany, while expressing worries about the situation in the real economies, which is still deep in the woods. Draghi could be pleased with some unwinding of the LTRO seen recently and repeat the forecasts for a recovery in H2 2013. The overall atmosphere is likely to be hopeful, yet cautious. The euro could rise a bit at the end of Draghi’s presser. Hints of rate hikes are still far in the future.
- German Trade Balance: Friday, 7:00. Germany’s trade balance showed a surplus of €14.6 billion in November, compared with €14.9 billion registered in October. In 2011, German surplus had amounted to €16.1 billion. German exports were unchanged in November on an annual basis, while imports dropped 1.2%. A wider surplus of 13.7 billion is expected this time.
*All times are GMT.
EUR/USD Technical Analysis
Euro/dollar started the week capped by the mighty 1.3480 line (mentioned last week). After a struggle, the pair made a breakout and found itself capped at 1.3588. When this line was eventually broken, EUR/USD even climbed above 1.37 before retreating to close at 1.3639.
Technical lines from top to bottom:
1.40 is the ultimate resistance line for now – this is a round number eyed by many politicians, and also worked as true technical support in the past. Below, 1.3915 capped the pair in late 2011 and is minor resistance now.
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 is a key line on the downside.
1.3480 was the peak seen in February 2012 and provides a significant backstop to 1.34. 1.34 was a stubborn cap during the spring of 2012 and continued its stubborn stance in January 2013 – it is a key line, now to the downside.
1.3360 is the recent peak of January 2013 and is a stepping stone for the levels above. 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. 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.
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.
Uptrend channel broken
As the chart clearly shows, uptrend resistance has been clearly broken. the pair in an uptrend channel since mid-December and eventually broke higher. Also a more recent channel on the hourly chart was broken to the upside.
I am bullish on EUR/USD
The flow of money into the euro-zone seems unstoppable. The break of quite a few technical barriers and the inability to participate in the currency wars will probably mean another good week for the euro-zone.The improvement in financial markets currently outweighs the ongoing recession. The higher exchange rate also limits growth prospects by hurting exports. But in the meantime, the “pro-Euro” feeling is very strong.
In the US, the OK employment report and the strong revisions are far from enough to trigger any kind of change in the Fed’s policy anytime soon.
More fresh technical analysis: Euro-Crosses Could Extend Even Higher In Risk-On Environment – 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