EUR/USD had a bad week, losing ground after losing the range. The re-election of Obama combined with no little progress on Greece sent the pair lower. German ZEW Economic Sentiment, and the initial GDP readings for Q3 are the highlights of this week. Here is an outlook on the highlights for this week and updated technical analysis for EUR/USD, now at lower ground.
The Greek parliament approved the austerity measures required for another round of bailout funds, but these aren’t guaranteed yet. Is the country closer to leaving the euro, or will its upcoming bond payment at the end of this week, be taken care of? The European Central Bank kept rates at 0.75% and warned about the economic situation. More importantly, Draghi practically said that the crisis is reaching Germany. Indeed, German exports plunged to the lowest level since December, amid low demand from the EU and global markets. In the US, Obama’s re-election ignited fears of a less-than-perfect resolution of the looming fiscal cliff and caused a rise in the dollar and a sell-off of stocks. This theme could somehow be resolved at the last moment.
Updates: The EuroGroup continues to meet in Brussels. The finance ministers failed to reach an agreement on further aid to Greece, but agreed to give Greece a two-year extension, until 2016, to reduce its deficit to 2% of GDP. The EuroGroup also decided to postpone a decision on the next tranche of aid until November 20. French Prelim Non-Farm Payrolls fell 0.3%, just below the estimate of 0.2%. German ZEW Economic Sentiment dropped -15.7 points, well below the forecast of -9.9 points. The Euro-zone Economic Sentiment also was a disappointment, as the indicator fell 2.6 points. The estimate stood at 0.2. The euro dropped below the 1.27 line, but has since improved. EUR/USD was trading at 1.2710. French CPI rose a modest 0.2%, matching the estimate. Euro-zone Industrial Production was very sluggish, declining 2.5%. The estimate stood at -1.6%. This was the indicator’s sharpest drop since March 2009. The Italian 10-year Bond Auction saw yields drop slightly, with an average yield of 4.81%. The previous average yield was 4.92%. Euro-zone GDP data was better than expected. French Preliminary GDP rose 0.2%, beating the estimate of 0.0%. GermanPreliminary GDP also rose 0.2%, just above the forecast of 0.1%. The ECB released its Monthly Bulletin. Italian Preliminary GDP dropped 0.2%, but this was better than the estimate of -0.4%. Euro-zone CPI jumped 2.5%, matching the market forecast. Euro-zone CPI climbed 1.5%, also matching the estimate. Euro-zone Flash GDP dropped 0.1%, just above the estimate of -0.2%. EUR/USD is steady, as the pair was trading at 1.2755.
- Eurogroup Meetings: Monday. Finance ministers from 17 euro members will gather to decide on a new strategy to unfreeze emergency lending to Athens, following its fiscal deterioration, worsened by the reforms demanded by the International Monetary Fund and euro zone countries in exchange for new loans. However progress also depends on good will of Greece. This is critical towards the bond repayment of November 16th.
- French Non-Farm Payrolls: Tuesday, 7:45. French job labor force contracted in the second quarter by 0.1%.France’s economy flat-lined in the three months to June, facing a steadily rising jobless rate. However Finance Minister Pierre Moscovici claims France would meet the government’s growth forecast of 0.3% this year. Another decline of 0.2% is expected now.
- ECOFIN Meetings: Tuesday. Ecofin, euro zone’s financial decision making body, concluded its October meeting with no significant results. The IMF cut its global growth forecasts still regarding the possibility of the EU’s debt crisis escalation as a major downside risk.
- German ZEW Economic Sentiment: Tuesday, 10:00. German investor sentiment increased more than expected in October, climbing to -11.5 from-18.2 in September. This was the second consecutive increase, suggesting fears that the euro zone’s debt crisis worsen were eased. The ECB’s plan to but unlimited bonds from weak EU countries raises hopes, but default of EU members remain the euro zone’s biggest fear. A further improvement to -10.1 is forecast. The all-European figure will likely rise -1.4 to -0.2 points.
- Industrial Production: Wednesday, 10:00. euro zone manufacturing output increased well above predictions in August, advancing 0.6% following the same increase a month ago. Analysts expected 0.4% contraction. The increase was prompted by summer demand for food and French car production, but the future does not seem bright for this indebted region. A decline of 1.6% is anticipated.
- French GDP: Thursday, 6:30. French economic growth was flat in the second quarter, marking the third consecutive quarter of zero growth but was better than the 0.1% contraction predicted by analysts. Domestic sector has improved but exports grew less than imports. French economic growth is expected to be flat this time. French PMIs have recently improved after a plunge beforehand.
- German GDP: Thursday, 7:00. Germany’s GDP growth eased in the second quarter rising 0.3% following a 0.5% expansion rate in the first quarter. Investment in machinery and equipment dropped, but the contribution from exports was positive in both public and private consumption edged up. An even slower growth rate of 0.1% is expected. The core is not immune.
- ECB Monthly Bulletin: Thursday, 9:00. The ECB bulletin detailing statistical data from the ECB rate decision meeting which brought no news: the rate remained unchanged, the OMT is ready for use and the economic situation remains bad. We’ll get more details on how bad the situation is.
- Italian Prelim GDP: Thursday, 9:00.Italy’s economy contracted 0.7% in the second quarter, following the same decline in the first quarter reflecting a deepening recession, due a 20 billion euro austerity measures imposed by the Italian Government. Prime Minister Mario Monti tried to persuade other European leaders to loosen the austerity measures to enable Italian economy to grow, rather than slip to a deeper recession. A contraction of 0.4% is anticipated.
- Inflation data: Thursday, 10:00. Consumer price inflation in the euro zone slowed unexpectedly in September to 2.6%, down from an initial estimate of 2.7% and following a 2.7% in the previous month. Meantime Core CPI, excluding food, energy, alcohol, and tobacco remained steady at 1.5%, unchanged from a preliminary estimate, but below expectations for a gain of 1.6%. CPI is forecasted to grow by 2.5% while Core CPI is predicted to climb 1.5%.
- Flash GDP: Thursday, 10:00. The eurozone economy contracted 0.2% in the second quarter leaving Germany as the only as a bright spot in the zone. However even Germany will eventually cave in to recession in case the EU debt crisis continues to worsen. Another 0.2% contraction is expected this time, placing the euro-zone in an official recession: two consecutive quarters of economic squeeze.
- Current Account: Friday, 9:00. The eurozone’s current account surplus increased to 8.8 billion euros ($11.5 billion) in August from 8.1 billion euros the previous month, providing fresh hope for investors. Over the 12 months to August, the current account showed a surplus of 72.4 billion euros, compared with a deficit of 21.6 billion euros in the previous year.
*All times are GMT.
EUR/USD Technical Analysis
€/$ began the week on a weak note, falling below the wide range and losing the 1.28 line (mentioned last week). It then continued gradually lower, losing also the 1.27 handle. Here is a guide to the breakdown.
Technical lines from top to bottom:
We start from lower ground this time. 1.3170 worked very well as a double top during September 2012 and is now the top frontier of the range. A failure to get closer to this line shows that the pair has limited momentum. 1.3140 was the high of October and is minor resistance before 1.3170.
1.3080 capped the pair in September and then again in October. 1.3030 provided some support at the same period of time. 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. It recently worked as a battleground and the pair is now well below this line. 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 weaker now.
1.2880 provided some support in October and now switches to resistance. 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 weaker now. 1.2690 was the new low after the November breakdown, and will be closely watched.
1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.
Below, the round number of 1.25 is not only of high psychological significance (USDEUR 0.80) but also worked as support during the summer of 2012. 1.2440 is already a stronger line, that was a clear separator during August.
Below, 1.2390 was resistance in July. 1.2250 is lower support, also at that time.
1.2140 is a very strong line that separated the low range from the rest, and the 2012 low of 1.2042 is the last line for now.
Downtrend Support Forming
The clear break of the narrowing channel to the downside, led to a continued downfall. We can now begin seeing the pair trading along downtrend support, that began in mid-October.
More technical analysis from James Chen: Forex Analysis: EUR/USD Continues Bearish Stance
I turn from bearish to neutral on EUR/USD
This change in sentiment is based on a potential can kicking exercise for Greece that could stabilize the situation and allow the pair to consolidate after the recent losses. There is already a model for this: the revolving doors move in August. In the US, markets could also begin changing the sentiment towards the fiscal cliff, at least for now, while there’s still time for some kind of compromise.
However, regarding Greece, things could also go wrong, very wrong. Now that the US elections are over and the “end of the autumn” is here, we cannot rule out Greece will exit the euro-zone. For how long can leaders extend and pretend? At this time, everybody knows that Greece will need more debt restructuring, something that could be impossible for Germany to do. In addition, European leaders now know who is in the White House – with whom to coordinate a potential Grexit. In such a case, EUR/USD could fall like a rock.
On this topic:
- 5 Reasons Why Greece Could Leave the Euro-Zone After the US Elections
- How to trade the Grexit with EUR/USD
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.
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- USD/CAD (loonie), check out the Canadian dollar forecast