EUR/USD had an excellent week, enjoying the optimism that came from the ECB. Industrial data and inflation figures are the major events this week. Here is an outlook on the main market-movers this week and an updated technical analysis for EUR/USD, now at higher ground.
The European Central Bank maintained its interest rate at 0.75% and the deposit rate at 0%. The decision was made unanimously amid strong capital inflows into the euro area and a rise in deposits at banks in periphery countries. However Draghi also said the euro-zone economy is still weak therefore the medium-term outlooks should not be changed. Markets preferred the glass half full and rallied very strongly, sending the pair above the triple top. Let’s Start
Updates: German WPI came in at 0.0%, well below the estimate of 0.5%. Italian Industrial Production dropped 1.0%, much worse than the estimate of -0.1%. Eurozone Industrial Production also disappointed, falling -0.3%. The estimate stood at 0.2%. German Final CPI rose 0.9%, matching the forecast. The French Government Budget Balnance pointed to a deficit of 103.4 billion euros, its highest level in almost two years. There was some good news from the Eurozone Trade Balance, which came in at 11.0B. This surplus easily beat the forecast of 8.2B. The euro continues to lose ground, as EUR/USD was trading at 1.3327. Italian Trade Balance looked sharp, posting a surplus of 2.36 billion euros. This beat the estimate of 1.91B. Eurozone CPI rose 2.2%, matching the forecast. Eurozone Core CPI also came in as forecasted, rising 1.5%. The German 10-year Bond Auction posted an average yield of 1.56%. The previous yield, back in November, came in at 1.40%. The ECB Monthly Bulletin was released on Thursday. The report stated that the Eurozone economy should improve later in 2013, and inflation was expected to drop below the ECB’s 2% target. The euro bounced higher after positive remarks by ECB governing council, member Ewald Nowotny, and was trading at 1.3378.
EUR/USD daily graph with support and resistance lines on it. Click to enlarge: 
- German WPI: Monday. German wholesale price inflation continued to drop in November, declining 0.7%, contrary to predictions of a 0.4% rise. This reading came after a 0.6% decline in the previous month. A rise of 0.5% is expected now.
- Italian Industrial Production: Monday, 9:00. Industrial production continued its downward trend in October, dropping 1.1%, missing predictions for a 0.2% decline. Industrial output reached its weakest level since August 2009, contributing to the Eurozone’s GDP contraction in the fourth quarter. A small decline of 0.1% is forecasted now.
- Industrial Production: Monday, 10:00. Industrial output registered a 1.1% contraction in October contrary to forecasts of a 0.3% rise, following a 2.3% decline in the previous month. The situation will continue to deteriorate unless a solution is found for the eurozon’s debt crisis. A rise of 0.3% is expected this time.
- German inflation data: Tuesday, 7:00. German inflation data was unrevised in November from the preliminary reading of minus 0.1% following the same decline in October. Food and drinks increased while clothing and footwear dropped, keeping inflation under control. A rise of 0.9% is forecasted now.
- Trade Balance: Tuesday, 10:00. Eurozone Trade surplus narrowed to 7.9 billion in October following lower than the 10.8 billion anticipated. Eurozone Trade surplus n.s.a. widened to 10.2 billion in October, from 9.5 billion in September below forecasts of widening to 15.5 billion. Surplus is expected to reach 8.2 billion.
- Inflation data: Wednesday, 10:00. Annual inflation in the Eurozone reached 2.2% in November above the ECB’s target rate, following the same figure in October. Europeans spent less on travel and restaurants and hired fewer people in November, making it difficult for companies to raise prices. CPI is expected to reach 2.2%, while Core CPI is predicted to register 1.5%.
- ECB Monthly Bulletin: Thursday, 9:00. The ECB’s governing council decided at its meeting on 6 December to maintain the key nterest rates unchanged. The economic weakness in the euro area is anticipated to continue in 2013.They have also decided to continue the MRO program to aid producers. Economic outlook is still negative for the euro area.
*All times are GMT.
EUR/USD Technical Analysis
€/$ began the week by struggling with the 1.3130 line (mentioned last week) and eventually falling. This dramatically changed later on, as the pair surged. It paused at the 1.3290 line at first, and then broke higher and peaked at 1.3360 before closing at 1.3341.
Technical lines from top to bottom:
We start from higher lines: in the distance, 1.3838 was a critical spot in both directions when the pair was trading on higher ground. 1.3750 was also a pivotal line in 2011. 1.36 was a cushion in the fall of 2011 and then switched to resistance.
1.3480 was the peak seen in February and provides a significant backstop to 1.34. 1.34 was a stubborn cap during the spring of 2012 and is the far line in the distance.
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.
1.3240 was now a pivotal line in the middle of December’s high range. It separated trading zones more than once in December and also provided some support in January. 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.
1.2880 provided some support in October and also in late November and December. It proved to be a backstop on the initial false rally after Obama’s victory. 1.28 is the bottom border of the range, and was eventually left behind. The pair fell to this low in September and later got close to it.
1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now a pivotal line in the range. 1.2690 was the new low after the November breakdown, and also provided support on a second downfall attempt in November 2012.
1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.
I am neutral on EUR/USD
Draghi’s relatively positive words about the debt crisis and the financial system are accompanied with a continued drop in bond yields. Is the worst really behind us? Perhaps. But it is still uncertain if there will be any “positive contagion” to the real economy, which is clearly struggling. In the US, the economy is doing better, but Bernanke’s open ended QE and the sequel of the fiscal cliff are still weighing. All in all, the pair could find its balance on this higher ground.
More fresh technical analysis: EUR/USD Rebounds Off Key Support Confluence 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
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