EUR/USD had a yo-yo week, finally breaking the triple bottom but eventually emerging as a winner. Has the single currency turned a corner, or is it a correction before the next fall? Key German surveys and PMIs are the highlights of this week. Here is an outlook on the main market-movers ahead.
Last week a senior member of the ECB hinted that an interest rate cut could be in the cards or risk a deeper recession. The Italian elections and the persistent contraction in other EU economies such as Spain and France might compel the ECB to act. In the US, more encouraging data has been reported: retail sales and jobless claims came out better than expected. However, this is probably not enough for Bernanke to act. Let’s Start
Updates: Italy posted a Trade Deficit of 1.62 billion euros. The markets had expected a surplus of 2.11 billion. The Eurogroup met in Brussels on Monday. The Eurozone Trade Balance narrowed in February to 9.0 billion euros. The estimate stood at 10.4 billion. Italian Industrial Production looked sharp, climbing 0.8%. This easily beat the forecast of -0.3%. German ZEW Economic Sentiment, a key indicator, climbed to 48.5 points. This was well above the estimate of 47.9. Eurozone ZEW Economic Sentiment was a disappointment, dropping sharply to 33.4 points. This was way below the estimate of 43.7 points. The markets continue to monitor developments in Cyprus. The country had reached a deal with the EU and IMF for a 10 billion euro bailout, but a provision in the agreement which imposes a tax on bank account holders has led to widespread anger on the island and a run on the banks. The government is trying to soften the bank levy before parliament votes on the bailout. EUR/USD was trading at 1.2947. German PPI declined 0.1%, missing the forecast of 0.2%. Eurozone Current Account was excellent, posting a surplus of 14.8 billion euros. This easily beat the forecast of 7.9 billion euros. German 10-year bonds fetched a yield of 1.36%. Eurozone Consumer Confidence continues to look weak, posting a reading of -24 points. The estimate was -23 points. PMIs looked weak across Europe. French Manufacturing PMI came in at 43. 9 points, lower than the estimate of 44.4. French Services PMI posted a reading of 41.9, well below the forecast of 44.1. German Manufacturing PMI dropped below the 50-point threshold, to 48.9 points. The estimate stood at 50.8. German Services PMI came in at 51.6, well below the estimate of 54.9. Eurozone Manufacturing PMI came in at 46.6, and the Services PMI at 46.5. Both were below their respective estimates of 48.2 points. Spanish 10-year bonds came in at an average yield of 4.90%, very close to the previous yield of 4.92%. The euro is unsteady, as EUR/USD was trading at 1.2923.
- Italian Trade Balance: Monday, 9:00. Italian Trade surplus narrowed to a seasonally adjusted 2.16B, from 2.36B in the preceding month, a bit lower than the 2.22B forecast by analysts. A further contraction to 2.11B is expected now.
- Trade Balance: Monday, 10:00. The euro zone increased its trade surplus in December to 11.7 billion euros, from 10.5 billion in registered in November. The reading was better than the 10.07 billion surplus projected by analysts. The trade surplus of Europe’s largest exporter, Germany, edged up in the first 11 months of 2012 to almost 175 billion euros from 145 billion a year earlier. But the biggest improvement was in Italy, which soared to a 9 billion euro surplus in the first 11 months of 2012 from a deficit of almost 27 billion euros a year earlier. A decline to 3.4 billion is forecasted this time.
- Italian Industrial Production: Tuesday, 9:00. Italian industrial output increased more than forecast in December, rising 0.4% after a 1.1% drop in November. The reading beat predictions of a 0.2% climb. The Italian government and the central bank forecast a return to economic growth in the second half of 2013 amid a rise in export. A drop of 0.3% is forecasted.
- German ZEW Economic Sentiment: Tuesday, 10:00. German analysts’ sentiment brightened in February amid predictions of recovery in the Eurozone. The index rose to 48.2 compared to 31.5 registered in January. The reading was well above predictions of 35.3 points. German economy is expected to continue its growth avoiding headwinds from the other Eurozone partners. A small decline to 47.9 is expected. The all-European figure is expected to rise from 42.4 to 43.7 points.
- German PPI: Wednesday, 7:00. The German producer price index (PPI) edged up 0.8% in January, from a revised decline of 0.3% in December, higher than the 0.4% predicted by analysts. On a yearly base, PPI growth gained 1.7%, from 1.5% in the year ending December, beating analysts` median estimate of 1.2%. A smaller gain of 0.2% is forecasted.
- Current Account: Wednesday, 9:00. Current account surplus narrowed slightly in December reaching 13.9 billion, following 15.9 billion in the previous month. The reading was lower than the 15.3 billion projected by analysts yet, the block’s trade surplus continued indicates the region is exporting more goods than it imports, which should boost the Economy. A further contraction to 7.9 billion is expected this time.
- Consumer Confidence: Wednesday, 15:00. The euro zone consumer sentiment improved slightly reaching -23.6, up from -23.9 in January, while analysts expected the index to advance to -23. This reading indicates that the Eurozone’s debt crisis continues to affect household spending but improvements are underway. Another improvement to -23 is forecasted.
- Flash PMIs: Thursday: beings at 8:00 in France, continues in Germany at 8:30 and ends for the whole euro-zone at 9:00. Generally weak PMIs were registered in February, despite the optimism among analysts. The French PMI Services report declined to 42.7 (versus 44.5 expected) and reached a fresh 48-month low. French PMI Manufacturing got better with a 43.6 point reading, from 42.9 in the previous month, but lower than the 43.9 forecast. In Germany, the PMI Manufacturing report showed an increase to 50.1 following 49.8 in the previous month, but again weaker than the 50.4 expected. The Eurozone manufacturing PMI disappointed with a 47.8 reading vs. 48.9 in January, while economists expected the index to improve to 48.4 and services plunged to 47.3 from 49.2 expected. Both figures remained below the 50 point line, indicating contraction. The expected readings are as followed: French Manufacturing – 44.4, Services – 44.1, German Manufacturing – 50.8, Services – 54.9, Eurozone Manufacturing – 48.2, Services 48.2.
- German Ifo Business Climate: Friday, 9:00. The German business sentiment surged to 107.4 in February, from 104.3 in the prior month, posting its strongest monthly rise since July 2010.This sharp rise suggests that German economy is forecasted to rebound strongly from the weak closure of 2012. February’s figure beat predictions for a 104.9 reading. Another improvement to 107.8 is expected now.
- Belgium NBB Business Climate: Friday, 14:00. Belgian business confidence improved moderately by 2.2 points to -11in February, following nearly a year of contractions, indicating a possible rebound trend. Belgium’s economy exports a large number of semi-finished goods to the Germany. The improvement in Germany may bring growth to Belgium’s economy. Another climb to -10.3 is expected now.
*All times are GMT
EUR/USD Technical Analysis
Euro/dollar started the week with a gradual ascent, but it then fell, breaking the triple bottom. From the lows of 1.2910, the pair managed to recover quickly, challenging the 1.31 line (mentioned last week) before closing at 1.3076.
Technical lines from top to bottom:
1.3588 worked as a clear separator of ranges during January 2013 and proved to work as resistance in February. 1.3486 was the peak seen in February 2012 and is a separator of ranges. An attempt to break higher eventually failed.
1.34 was a stubborn cap during the spring of 2012 and continued its stubborn stance in January 2013 – the line now serves as resistance. These are the head and shoulders lines. 1.3350 was a peak in January 2013 and worked very nicely as support during February. The line is weaker now.
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. A recovery attempt failed to reconquer this line. 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 worked as strong resistance after the Italian elections. This is a key line, now on the upside. 1.3130 proved to be strong resistance during December 2012 showed its strength in March 2013 as well.
1.3100 is a minor line after working as temporary resistance in December 2012. 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. However, the recent battles weakened it, and now makes the next line very important.
1.2960 provided some support at the beginning of the year and also in September and October – the line is strengthening once again after working as a triple bottom. This is the key on the downside.
Lower, 1.2880 worked in both directions during 2012 and was the beginning of the uptrend support line. Lower, 1.2805 was the bottom border of the wide 1.2805-1.3170 that characterized the pair’s trading for a long time.
Below, 1.2746 worked as a separator of ranges during November, and is a minor line on the downside. This is followed by the round number of 1.27, which is minor as well. The really important line is the November trough of 1.2660.
Further below, 1.2587 is worth mentioning.
I am neutral on EUR/USD
The general direction remains down: the EU economies are struggling, unemployment is rising and inflation is falling. In the United States, economic indicators show signs of a somewhat accelerated recovery. Nevertheless, the Federal Reserve is likely to leave policy unchanged, weighing on the dollar. The Fed decision and the very busy European calendar promise excitement.
More technical analysis: EUR/USD Confirming Continuation of New Bearish Trend – by James Chen.
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