EUR/USD Forecast Jan. 4-8

EUR/USD  slipped within the range in the close of 2015, erasing previous gains. 2016 begins with a busy calendar: PMIs and inflation data stand out as liquidity returns. Will the pair continue falling in 2016 or make a comeback?  Here is an outlook for  the highlights of this week and an updated technical analysis for EUR/USD.

In the holiday week, we learned that inflation is still an issue in Europe, with Spain recording no change in prices.  Also in the US, data was disappointing, with misses in jobless claims and housing, while only consumer confidence beat expectations.

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

1. Manufacturing PMIs: Monday morning: Spain at 8:15, Italy at 8:45, Final French number at 8:50, final German at 8:55 and final euro-zone figure at 9:00. Spain, the euro-area’s fourth largest economy, saw a level of 53.1 points in November and a repeat is expected now. This is above the 50 point threshold separating growth from contraction. Italy, the third largest economy, saw 54.9 points and also here, the same figure is  on the cards. According to the preliminary releases for December,  France’s score was 51.6, Germany was at 53 and the euro-zone at 53.1 points. These figures are expected to be confirmed now.
2. German inflation: Monday: the various states release the numbers during the morning and the final figure is published at 13:00. Prices rose by 0.1% in November m/m and an accelerated rise of 0.2% is on the cards now. This feeds into the all-European data.
3. Spanish Unemployment Change: Tuesday, 8:00. Spain still suffers from high unemployment and this monthly gauge draws attention. The number of unemployed dropped by 27.1K in November and a bigger drop of 52.6K is expected now.
4. German Unemployment Change: Tuesday, 8:55. The euro-zone’s locomotive enjoyed yet another drop of 13K in the number of jobless and a smaller fall of 7K is on the cards now.
5. Inflation data: Tuesday, 10:00. Low inflation and occasional deflation has triggered action from the ECB. This time, expectations are for an improvement, especially as the base effect of falling oil prices begins to diminish. Headline inflation is expected to rise from 0.2% to 0.4% in December y/y. Core inflation carries expectations for a move from 0.9% to 1%. The ECB, which convenes on January 21st, will be watching this very closely.
6. Services PMIs: Wednesday  morning: Spain at 8:15, Italy at 8:45, Final French number at 8:50, final German at 8:55 and final euro-zone figure at 9:00. The services sector enjoyed strong growth in Spain: 56.7 points in November. Another rise to 56.9 is predicted now. In Italy, the score is expected to advance as well: from 53.4 to 53.8 points. The preliminary number for France showed a flat 50 points  score, and this will likely be confirmed now. For Germany, Markit showed 55.4 points and the euro-zone saw 53.9 points. Also these numbers are expected to be confirmed now.
7. PPI: Wednesday, 10:00.  Producer prices eventually feed into consumer prices. A drop of 0.3% was seen in October, and a smaller drop of 0.2% is expected now. In the past two months, producer prices beat expectations.
8. German Factory Orders: Thursday, 7:00. While this figure is volatile, it still has an impact. After a strong rise of 1.8% in October, a modest rise of 0.1% is on the cards now.
9. German Retail Sales: Thursday, 7:00. Consumers spent 0.4% less in October in comparison to September and this missed expectations. This time, a bounce back with +0.5% is on the cards.
10. Retail PMI: Thursday, 9:10. After a few positive months, this gauge of the retail sector dropped back to contraction zone, with 48.5 points, below the 50 points threshold. Will  Christmas shopping boost confidence in December?
11. Unemployment Rate: Thursday, 10:00. The euro-zone still suffers from a high unemployment rate, reaching 10.7% in October, and no change is expected for November.
12. Retail Sales:Thursday, 10:00. Despite its release after the German numbers, the publication can still surprise. A drop of 0.1% was seen in October and a small rise of 0.2% is predicted now.
13. German Industrial Production: Friday, 7:00. Industrial output in Europe’s powerhouse saw a rise of 0.2% in October and another rise of 0.4% this time is predicted.
14. German Trade Balance: Friday, 7:00. Germany’s export machine results in a high trade surplus, which keeps the euro bid. After a positive number of 20.8 billion in October, a surplus of 20.1 billion is on the cards now.
15. French Industrial Production:Friday, 7:45. France, the continent’s second largest economy, saw a nice rise of 0.5% in output during October. A slide of 0.2% is expected now.
16. French  Trade Balance:  Friday, 7:45. Contrary to Germany, France has a trade deficit, that reached 4.6 billion in October. A squeeze to 4 billion is expected now.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar  traded within the ranges seen in previous weeks, staying shy of 1.10 and eventually falling to lower ground, closing under the 1.0880 level..

Technical lines from top to bottom:

1.13 worked as support back in October and is the high line at the moment. It is followed by the swing low of 1.1220 in September which is minor resistance now.

1.1140 cushioned the pair in October.  1.1050 is the high seen in December and the next challenge on the upside.

1.10 is a round number and  significant resistance.  1.0925, which was a support line in December, is the next support line. 1.0850 was the level the pair bounce off at the dying moments of 2015.

The round level of 1.08 worked as a double bottom in December and should be watched.  1.0710 is the  next support line on the  chart after temporarily capping the pair in April 2015.  1.0630 worked as nice support in November 2015 and then switched to resistance.

It is the last line  before plunging to 1.0530, that supported the pair in April.  Below, the 12 year low of 1.0460 seen in March.

I turn from neutral to bearish  on  EUR/USD

Markets are getting back to business and monetary policy divergence remains the name of the game: euro-zone inflation could remind us that the ECB could still introduce more easing and even if US figures are mediocre, the Fed is set to hike again.

Here is our  2016 Financial Markets Guide:

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