EUR/USD had a roller coaster week, ending 2013 on high ground only to crash in the wake of 2014. What’s next? The ECB rate decision is all important, especially Draghi’s press conference. In addition, service PMIs, German inflation data, retail sales, employment data will move markets. Here is an outlook on the interesting events ahead. Here is an outlook on the major events at the year’s end and the beginning of 2014 and an updated technical analysis for EUR/USD
According to the confirmed manufacturing PMIs, Germany and France continue to diverge, with the former expected to grow nicely and the latter to squeeze. Spanish data released last week posted a great start to 2014. Unemployment claims plunged by 107.6 thousand. In the US, data has been quite good, enabling the comeback of the dollar after retreating on thin volume in late 2013. The pair broke below long term uptrend support and stopped only before the week ended. Let’s start:Updates:
EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- German CPI: Monday. The inflation rate in Germany picked up in November, according to preliminary data showing a 0.2% monthly rise, following a 0.2% fall in the previous month. The reading was higher than the 0.1% rise expected by economists. However inflation remains relatively subdued.
- Services PMIs: Monday. Spain’s service sector expanded in November to the highest level in more than three years, reaching 51.1 after posting 49.6 in October. 11-month business index edged up to 51.8 from 54.2 in October, the highest since July 2007. The increase suggests the service sector is growing at a satisfactory pace preparing for the holiday season. Meanwhile, Italy’s services PMI unexpectedly shrank in November, dropping to 47.2 from 50.5 in October, missing expansion. The gloomy data raises serious doubts regarding Italy’s ability to exit from recession in the fourth quarter. The Eurozone service sector expanded to 51.2 in November despite mixed readings, following 50.9 in October, beating market consensus of 50.9 reading. Italian is expected to reach48.9 and the Eurozone services PMI is expected to be 51.2.
- German Retail Sales: Tuesday, 7:00. German retail sales plunged unexpectedly in October by 0.8% following a 0.6% fall in the previous month, missing market predictions for a 0.5% rise. Bookstores and jewelers experienced the sharpest declines. Compared with a year earlier, retail sales dropped 0.2%. Nonetheless, analysts forecast a rise in retail sales due to the holiday season. A rise of 0.5% is expected now.
- German Unemployment Change: Tuesday, 8:55. German unemployment increased by 10,000 in November, rising for the fourth consecutive month following a 3,000 gain in October. Economists expected no change. German economy growth trend is endangered by the backdrop of a fragile Eurozone recovery. Furthermore, a planned minimum wage law domestically threatens to spike costs. Economists expect little change in the coming months and the jobless rate will continue to climb. A drop of 1,000 is expected in the number of unemployed.
- CPI Flash Estimate: Tuesday, 10:00. Flash CPI edged up 0.9% in November, exceeding expectations of a 0.8% rise and following a 0.7% in October. Core CPI also beat forecasts. The ECB cut its benchmark rate from 0.50% to 0.25% claiming there are low chances for increased inflation. A rise of 0.9% is forecast now.
- German Trade Balance: Wednesday, 7:00. Germany’s trade surplus contracted in October to 16.8 billion Euros from 18.7 billion in September amid a rise in imports exceeding exports. In seasonally adjusted terms, German exports reached 92.9 billion euros ($127 billion) in October, rising mildly from 92.7 billion euros in September. Imports, on the other hand, rose sharply by 2.8% to 76.1 billion euros from 74.0 billion euros. An expansion to 18.9 billion trade surplus is expected now.
- Retail Sales: Wednesday, 10:00. Retail sales in the Euro area continued to fall in October dropping 0.2% after a 0.6% decline in the preceding month, adding concerns that the fragile economic recovery in the 17-country eurozone is losing momentum in November. Declines in the PMIs for Italy and France raises the possibility that these economies will remain in recession in the fourth quarter. However Germany’s robust economic growth tips the scale for the Eurozone as a whole. A gain of 0.2% is forecasted.
- Unemployment Rate: Wednesday, 10:00. The eurozone’s unemployment rate declined for the first time since 2011, falling to 12.1% in October, from 12.2 in the previous month. There are huge disparities in unemployment rate between EU countries. The unemployment rate in Spain and Greece is about 27%, while Austria’s is only 5%. ECB president Mario Draghi remarked that low inflation and weak economic growth are the dominant characteristics of the region. The European Commission has forecast growth of 1.1% for 2014 and 1.7% for 2015. The eurozone’s unemployment rate is expected to remain 12.1%.
- German Factory Orders: Wednesday, 11:00. German factory orders plunged 2.2% in October, missing forecasts for a 0.4% decline, following a 3.1% gain in September. The weak figure suggests recovery has its ups and downs. Orders increased 1.9% from a year ago. Domestic demand was the main growth factor for Germany. the European Central Bank forecasted German economy will expand 1.1% in 2014. An increase of 1.2% is expected now.
- German Industrial Production: Thursday, 11:00. German industrial production continued to contract in October losing further momentum, with a 1.2% fall in October, following a 0.7% drop in the previous month. The reading was contrary to analysts’ predictions of a 0.8% rise. Meanwhile, foreign trade surplus narrowed to 16.8 billion euros due to a rise in imports for domestic demand. Analysts expected a gain of 0.8%. Germany’s large trade surplus has provoked criticism from a number of struggling EU members and the US recently asked Germany to rely more on domestic demand and limit its exports. A rise of 1.6% is forecasted now.
- ECB rate decision and press conference: Thursday, 12:45, press conference begins at 13:30. The ECB is unlikely to change its policy in January, but could certainly hint about looser policy in the next meeting. There are a few encouraging signs in the old continent, but financial conditions remain tight, and deflation is a threat, especially with a strong value of the currency. Draghi tends to zig-zag between an optimistic message to a pessimistic one. After sending a calm one in December, we can expect him to weigh on the euro this time, especially if the negative deposit rate option receives a bigger hint than usual.
- French Industrial Production: Friday, 7:45. French industrial output stubbornly remained in the contraction territory falling 0.3% in October, missing market forecast of a 0.2% rise. This decline followed another unexpected 0.5% drop in September. The negative readings contradict the 0.4% rise in manufacturing production. Bank of France projected French gross domestic product will gain 0.5% in the last quarter of 2014, 0.1 percentage point more than the previous first estimate. However following the string of disappointing data, it seems the French economy is not advancing as it should. A gain of 0.6% is predicted.
* All times are GMT
EUR/USD Technical Analysis
Euro/dollar began the week with an attempt to recapture the 1.3830 line (mentioned last week). The failed attempt proved that the Christmas surge was indeed a false break. From there, it was all downhill, with a short lived recovery attempt that stalled at 1.3675 in a perfect manner. After losing uptrend support, the pair stopped only at 1.3588.
Technical lines from top to bottom:
1.4036 was a separator back in 2011, and awaits the pair if it breaks above 1.40. 1.3940 was a peak in September 2011, over two years ago, and is just before the round number of 1.40.
1.3832 was the 2013 peak (excluding the post-Christmas break). The failure of the pair to get close to this line for a second time might make it a top for a long time, despite the false break. 1.38 is a round number and also worked as a temporary cap during that period of time and also in October 2013.
1.3710 was the previous 2013 peak, and served as a clear separator. The pair needed a big trigger to break above this line, and when it lost it again, the fall was painful. 1.3675 capped the pair in December and also provided some support back in October. It also stalled a recovery in January 2014.
1.3615 worked as resistance in December, as an upper bound for the range. It is followed by 1.3525, which was the lower bound during this period and also had the opposite role in early 2013.
1.3440 worked as a clear separator in early November 2013 and is a key line to the upside. 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 followed by 1.3240, which capped the pair in April and also had a role in August. It worked as support in September.
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.
Uptrend support convincingly broken
From early November, the pair trended higher, riding above an uptrend support line. As mentioned last week, it was hard for the pair to hold onto the line for too long. The break below was certainly painful. The downtrend black thick line emphasizes the lower high the pair reached: from 1.3830 in October to 1.38 in December, and was respected.
I am bearish on EUR/USD
The holidays are over and reality is back in town. Tighter credit conditions in the euro-zone are weighing on growth and could send the area back to recession. Deflation is still possible, despite denials. Draghi could now paint a more worried picture for 2014 and make bigger hints of action. A negative interest (certainly a possibility in Q1) could become a more serious threat.
In the US, positive signs continue into 2014. Non-Farm Payrolls could give the greenback another boost and raise expectations of an accelerated taper. The breakdown of support and the return to the lows seen in December are also a warning sign.
- EURUSD: Ending Diagonal Could Cause A Turning Point At the Start of 2014
- The Euro starts 2014 with a bang
- 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
- For the kiwi, see the NZDUSD forecast.