EUR/USD fell for the fourth consecutive week, dipping its toes under the 1.30 line following the indecisive Italian elections and the weak economic data. Will the slide continue? The rate decision and the preceding press conference are the highlights of a very busy week. Here is an outlook for the events moving the euro and an updated technical analysis for EUR/USD, now in lower ground.
The Italian elections resulted in a deadlocked Senate. This sent the euro plunging. Political parties are trying to find a compromise, but there seems little room for cooperation. Italy might go to the polls again soon. The euro-zone’s third largest economy already has serious issues: unemployment is rising fast and PMIs point to a deepening recession. The euro-zone as a whole is seeing higher unemployment and now also lower inflation – below the ECB’s target. Will Draghi cut the rates or hint about an upcoming rate cut? Let’s start:
Updates: Spanish Unemployment Change fell sharply to 59.4 thousand. This was well below the forecast of 77.5 thousand. The Eurogroup finance ministers met on Monday in Brussels. Eurozone Sentix Investor Confidence fell to -10.6 points, much worse than the estimate of -4.5. Eurozone PPI increased by 0.6%, just above the estimate of 0.5%. Spanish Services PMI disappointed, coming in at 44.7 points. This was well below the estimate of 45.9. Italian Services PMI came in at 43.6 points, matching the forecast. Eurozone Final Services PMI dropped to 47.9 points, but managed to beat the estimate of 47.3 points. The EU finance ministers are meeting on Tuesday in Brussels. Eurozone Retail Sales sparkled, climbing 1.2%. This crushed the estimate of 0.3%, and was the biggest gain since 2008. EUR/USD was trading at 1.3047. Eurozone Revised GDP declined 0.6%, as expected. French Trade Balance posted a larger deficit, at -5.9 billion euros. The estimate stood at -4.8 billion. The Spanish 10-year bond auction fetched an average yield of 4.92%. This was lower than the previous yield of 5.20%. French 10-year bonds posted an average yield of 2.10%. This was lower than the previous yield of 2.30%. German Factory Orders looked awful, declining 1.9%. The markets had anticipated a gain of 0.6%. As expected, the ECB maintained its benchmark interest rate at 0.75%. EUR/USD has edged higher, and was trading at 1.3056.
- Spanish employment data: Monday, 8:00. Spanish unemployment rose to 4.98 million in January, with a 132,055 new unemployed in January alone, following a reduction of 59,100 unemployed in December. This high figure indicates the eurozone’s fourth-largest economy is struggling with the highest unemployment rate since the death of General Francisco Franco in 1975. A rise of 77,500 unemployed is expected this time.
- Sentix Investor Confidence: Monday, 9:30. Euro-zone Sentix investor sentiment improved to -3.9 in February following -7 in January, amid the ECB forecast of the Eurozone growth in the second part of 2013. Sentiment is expected to worsen to -4.5.
- PPI : Monday,10:00. Euro-zone producer prices continue to drop in December down 0.2% in December following the same decline in the previous month. The reading was in line with market expectations. The Annual inflation in January dropped to 2.0% complying with the ECB’s target for 2013. A gain of 0.5% is expected now.
- Services PMIs: Tuesday. Eurozone services PMI improved to a ten month high in January with a reading of 48.6 from 47.8 in December, despite an ongoing contraction in this sector. This reading was higher than the 44.7 predicted by analysts. Meanwhile, the Italian and Spanish service economies all remained in contraction in January, although Spain registered a nice climb to 47 from 44.3 in December. Italy disappointed with a lower than expected reading of 43.9 following 45.6 in December. Only Germany is showing signs of recovery. Spanish Services PMI is expected to climb to 47.8, Italy Services PMI is forecast a further decline to 43.6 and the Eurozone is expected to decline to 47.3. Manufacturing PMIs were quite disappointing.
- Retail Sales: Tuesday, 10:00. Retail sales in the 17 countries euro countries, dropped sharply in December by 0.8%, following 0.1% decline in November. Nevertheless the worst is over for the Eurozone according to analysts’ forecast with an ongoing steady improvement. An increase of 0.3% is forecast now.
- Revised GDP: Wednesday, 10:00. The initial GDP report showed a significant contraction of 0.6%, led by a contraction of the same rate in Germany. While the German contraction is seen as a one-time event, many other countries are in a long recession, and will probably see it going on for a few more months. The 0.6% drop will likely be confirmed now.
- German Factory Orders: Thursday, 11:00. German factory orders rebounded in December, rising 0.8% following a 1.8% plunge in the previous month. The climb occurred amid rising demand. Furthermore German business climate has also improved, signaling an end to weakness in the industrial sector. An increase of 0.6% is predicted now.
- Eurozone rate decision: Thursday, 12:45, press conference at 13:30. The ECB isn’t likely to move on the rates in the March meeting. Draghi’s warning on the exchange rate of the euro already had a significant effect, and the elections in his home country already did more than a rate cut could have done to weaken the euro. The focus is expected to remain on the press conference. Draghi is likely to try and balance between the current economic situation which is quite depressing, and the optimism for growth in H2 2013, coming now from higher business confidence, mostly in Germany. An ongoing political turmoil in Italy could bring the OMT back into the limelight. The drop in inflation to 1.8% and the rise in unemployment to 11.9% could lead Draghi to hint about a rate cut in April. This could come in a form of saying that the decision was not unanimous, and that some members wanted a cut.
- German Industrial Production: Friday, 11:00. German Industrial Production increased 0.3% in December, rising for the first time in five months. The reading beat predictions for a 0.2% increase and followed a 0.2% contraction in November. Manufacturing output edged up 1.2% in December, while energy production dropped 3.4% over the month. A rise of 0.6% is forecasted.
*All times are GMT
EUR/USD Technical Analysis
Euro/dollar started the week very positively, rising above 1.33 before the real results came out of Italy. It then took a plunge, and traded between the important 1.30 and 1.3170 lines (discussed last week). After being capped at 1.31, the pair fell below 1.30 and challenged the 1.2960 line before closing above 1.30, at 1.3026.
Technical lines from top to bottom:
We start from lower ground once again. 1.3690 worked as support during the fall of 2011 and is a minor line. 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 turns into 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 and now switches positions to support. 1.3100 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. The move below this line in early March was eventually rejected. Will it break decisively this time?
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.
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.
Uptrend support breakdown proved critical: After sliding within the channel (thick black lines), EUR/USD made a clear breakdown and this let the pair fall. The channel accompanied the pair since December 2012 and was briefly broken to the upside.
I remain bearish on EUR/USD
While the Italian political mess could now be priced in, the troubles for the euro are far from over. The next sell-off could be now triggered by Mario Draghi. With a deep recession, rising unemployment and even low inflation (what the German Bundesbank eyes) the ECB now has more room to cut the rates. A rate cut is not priced in and has little chances. If it does happen, the euro will fall fast. However, even a hint of a rate cut has the potential to send the pair down.
In the US, signs remain mixed, but they are still more positive than negative. Last week we saw a dip under 1.3170 on Friday and a break below on Monday. Will we see a break below 1.30 after Friday’s dip?
More technical analysis: EUR/USD Approaches Head-and-Shoulders Downside Target – by James Chen.
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