EUR/USD Forecast June 29 – July 3 – Greek crisis

EUR/USD  was watching Greece very carefully with contrasting news causing confusion. The story became more dramatic after markets closed with the announcement of post-deadline referendum. In the last and busy week of H2, we have important inflation numbers and PMIs.  Here is an outlook for  the highlights of this week and an updated technical analysis for EUR/USD.

The reported breakthrough in the Greek crisis  on Monday did not last long as the skies darkened on Wednesday and Thursday. New hopes for a deal on Friday still lacked a few key factors. The euro has been reacting to the headlines, but often falling on good news. One reason is the refocusing on monetary policy divergence, that favors the dollar, and the other is that the common currency has become a funding or even a “safe haven” currency. But, in case of a “Grexit” or a “Grexident”, it is clear that the euro would plunge that is already worrying some brokers. The most recent development was the announcement of a referendum on the rejected proposals. This is planned for after the deadline, assuming that the Eurogroup approves a temporary extension of the deadline, which seems unlikely as of Saturday at noon. Update: the Eurogroup historically decided without Greece to reject the extension.

For the latest, see:

Greek crisis – all the updates in one place

The crisis has  overshadowed data, which has been balanced: better than expected PMIs but a weak IFO read. In the US, figures have been  more positive than negative, with home sales leading the way ahead of a busy but short week in the US.

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

1. Greek crisis events: Eurogroup meeting on Saturday at 12:00 and ongoing talks all the time towards  the June 30th deadline. This is when the current extension of the bailout expires, and also when Greece has to pay the IMF – payments it “bundled up” in early June. In the meantime, Greek banks lack cash and they depend on the now daily decision of the ECB. The ECB uses its Emergency Liquidity Assistance tool to lend money to the banks. In case of no deal during the weekend and no additional ELA, banks could remain shut on Monday.  At the time of writing a 5 month extension was discussed, but things are extremely fluid. Markets would cheer any resolution that  puts the topic to sleep, even if it is merely another can kicking  exercise.  More:  3 EUR Scenarios Our Greek Playbook – Morgan Stanley. And  Greek crisis – all the updates in one place
2. German CPI: Monday, during the morning with an all German  publication at 12:00. Inflation is beginning to show signs of recovery from the lows. In May, prices beat expectations and CPI advanced 0.1% m/m, as oil prices  stabilized in recent months. The initial number for June will likely show a rise of 0.2%.
3. Spanish CPI: Monday, 7:00.  The euro-zone’s fourth largest economy is one of the countries that suffered most from deflation, but this is beginning to wane off. After a y/y fall of 0.2% in May, we could see a better number in the preliminary read for June: -0.1% is on the cards.
4. German Retail Sales: Tuesday, 6:00. The zone’s  locomotive has enjoyed a big rise of 1.7% in the volume of sales in April,, but this may have been skewed by the Easter holiday. A modest rise of 0.3% is on the cards now.
5. French Consumer Spending: Tuesday, 6:45. After a  big fall in April, consumers in the continent’s second largest economy picked up spending in May with a rise of 0.1%. Another  advance could be seen now, worth 0.3%.
6. German Unemployment Change: Tuesday, 7:55. Unemployment is falling in the continent’s largest economy, but the drops have been smaller in recent months. After a drop of 6K unemployed in April, a similar number could be seen in May: -5K. The employment numbers have  a political impact.
7. Flash CPI: Tuesday, 9:00. After a long period of  extremely low levels, core inflation finally picked up in May and reached 0.9% y/y.  Headline inflation, which is the ECB’s target, stood on 0.3% y/y, and  the numbers are still affected by the fall in oil prices. A moderation is expected now, with a 0.2% rise in CPI +0.8% in core CPI.
8. Unemployment Rate: Tuesday, 9:00.  Contrary to German unemployment, the situation in the broader continent are less  encouraging. A level of 11.1% was recorded in April, a small improvement in comparison to previous months.  No change is expected.
9. Manufacturing PMIs: Wednesday morning: Spain at 7:15,  Italy at 7:45, the final number for France at 7:50, final for Germany at 7:55 and the final all-European number at 8:00.  Spain continued enjoying  significant growth  in May according to Markit’s indicator, with 55.8 points in the manufacturing sector. A slide to 55.6 is expected for June. Italy, the zone’s third largest economy, was a bit behind with 54.8 points in May and 55.2 is predicted now. The preliminary number for France showed 50.5 points in June, finally in growth territory. Germany enjoyed 51.9 points and for the whole euro-zone the number stood on 52.5 points. All three figures will likely be confirmed now.
10. Spanish Unemployment Change: Thursday, 7:00. Spain suffers one of the highest unemployment rates in the euro-zone, but the monthly changes in the number of unemployed are encouraging, even if they are impacted by seasonal factors related to tourism. A drop of 118K was seen in May and another fall is on the cards for June.
11. PPI: Thursday, 9:00. Producer prices dropped by 0.1% in April, worse than expected, and showing that  a real pick up in inflation is still a long way coming. A small rise of 0.1% is estimated now.
12. ECB Meeting Minutes: Thursday, 11:30. In the latest press conference, Draghi was quite calm on the QE program and saw no need to front-load bond buying or react to volatility. We will now get  an inside view on the internal talks within the Governing Council. What do the members foresee for the rest of the year?
13. Services PMIs: Friday morning:  Spain at 7:15, Italy at 7:45, the final number for France at 7:50, final for Germany at 7:55 and the final all-European number at 8:00. In May, the 58.4 score for the Spanish services sector reflected very strong growth, standing out from the rest. Did this continue in June? A score of 58 is predicted. Italy saw modest growth at 52.5 points and 52.9 is on the cards now. The initial French number for June was upbeat with 54.1 points, Germany saw 54.2 and the whole euro-zone at 54.4 points. The last three numbers are expected to be confirmed in the final read.
14. Retail Sales: Friday, 9:00. April saw a rebound in consumers’ activity, with a rise of 0.7% in the volume of sales, countering a drop of 0.6% seen in March. Despite being released after the German and French publications, the all-European figure has a  significant impact. A rise of 0.2% is predicted now.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar  gaped higher on Greek hopes, but things became messier later on.  The pair began descending and consolidated and “hugged” the 1.12 level (mentioned last week).

Live chart of EUR/USD: [do action=”tradingviews” pair=”EURUSD” interval=”60″/]

Technical lines from top to bottom:

1.17 was the launch value of the euro and is still high above. 1.1650 capped the pair after the SNBomb and is more significant.

The round level of 1.15 has a psychological impact and it also worked as support in the past. 1.1450 capped the pair during February’s  recovery attempts and also during May.

Below, the historic line of 1.1373 (from November 2003) still  has a role as resistance. 1.1290, which was a peak in April and support in February is significant resistance.

1.1190, just below the round number of 1.12, proved its strength as a double top in June 2015. It is followed by a low seen in  January  of 1.1113 which is nearly 0.90 on USD/EUR.

1.1050 was  a high point in March 2015 and now works as important support before the round level of  1.10. This is still a battle line.

The next line was minor support  back in  October 1999: 1.0910. It was resistance back then and was tested once again in March 2015.  This is followed by 1.0815 which worked in both directions.

The next line is  1.0760, which was the low point in both July and August 2003. 1.0715 joins the chart after temporarily capping the pair in April 2015.

1.0660 worked nicely as support in April 2015.  1.0615, which worked in both directions during March 2015 and is better at support.

Another minor line is 1.0550, for  a role as support in the same period of time.  The very round level of 1.05 served as support during 2003.  The lowest level in over 12 years is 1.0462 and this makes it critical support.

I am bearish  on  EUR/USD

A can kicking exercise is still the base case scenario, but if things go pear-shaped, EUR/USD could easily plunge towards parity. Assuming a deal, and as mentioned last week,  a relief  rally on a Greek deal could be short lived and help us refocus on monetary policy divergence. The ECB is still printing euros and has no plans to stop it, while data continues improving in the US, and the FOMC may be slightly more hawkish than perceived. The NFP could give the dollar another shot in the arm.

In our latest podcast, we discuss building on the US recovery, the Greek crisis and EUR, Saudi solar and next week’s events.

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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
• For the kiwi, see the  NZDUSD forecast.