EUR/USD Forecast November 5-9

EUR/USD made a significant move downwards and is now at critical support, as a deal between Greece and the troika seems hard to achieve, and as the US enjoyed a positive jobs report. The ECB rate decision and another round of Eurogroup meetings are among the main market movers on our list. Here is an outlook on the highlights for this week and an updated technical analysis for EUR/USD.  

Not only are the troika and Greece divided on labor reforms, but also from within: the IMF wants euro-zone governments to take a loss, and in Greece, the government is in a fragile situation. In addition, the required troika reforms could be unconstitutional. This could send the parties to the drawing board, as Greece will soon run out of money. In the US, Non-Farm Payrolls rose by 171K – more than expected. In addition, the rise in the participation rate and revisions also added to the good impression. This week, US voters go to the polls. The outcome will also have a significant impact on the markets. Will EUR/USD bounce or collapse? Fasten your  seat belts.

Updates: Spanish Unemployment Change looked terrible, climbing to 128.2 thousand. The estimate stood at 90.3K. Euro-zone Sentix Investor Confidence came in at a weak -18.8 points, slightly better than the market forecast. Spanish Services PMI rose slightly, to 41.2 points.  Italian Services PMI also improved, climbing to 46.0 points. Euro-zone Final Services PMI came in at 46.0 points, very close to the estimate of 46.2. German Factory Orders were a big disappointment, plunging by 3.3%. The markets had expected a modest drop of 0.3%. The markets will be closely attuned to the US presidential election results, with President Obama a slight favorite over Republican Mitt Romney. EUR/USD is choppy, and continues to test the 1.28 line. The pair was trading at 1.2794.  Obama is re-elected and the announcement is met with high volatility. EUR/USD rises to resistance at 1.2880 and then slides. The move downward accelerates on a warning by Draghi that Germany will enter a recession. The ECB left rates unchanged at a level of 0.75%. German Trade Balance came in at 17.0 billion, just below the  estimate of 17.2 billion. French Trade Balance improved, posting a deficit of 5.0 billion. This figure matched the market estimate. The ECB will hold a Press Conference later on Thursday. Euro-zone Retail Sales declined 0.2%, slightly  worse than  the estimate of 0.0%.  German data continues to point to an economy in trouble. Industrial Production slumped 1.8%, well below the estimate of -0.4%. The euro is steady after losing ground on Thursday morning. EUR/USD was trading at 1.2739.

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

1. Spanish Unemployment Change: Monday, 8:00. The number of people registering for jobless benefits increased by 79,645 in September from 38,200 in the previous month, an on a yearly base increasing 95,817 from the same month last year. The high unemployment rate of 25% is not expected to drop in 2013. A further increase of 90,300 unemployed is expected now. Spain reported another quarter of recession: Q3 GDP fell by 0.3%.
2. Spanish Services PMI: Monday, 8:15.Spain’s services sector worsened in September, reaching 40.2, following 44.0 in the previous month. This was the lowest level since last November sinking below forecasts for a dip to 42.5 indicating recession is still around and is not expected to end before 2013-2014.
3.  Sentix Investor Confidence: Monday, 8:30. European investor sentiment increased for a second month in October rising to minus 22.2 from minus 23.2 in September. The improvement occurred after the ECB announced its plan to buy bonds from countries affected by the EU debt crisis.  Another improvement to -20.7 is anticipated.
4. Italian Services PMI: Tuesday, 8:45. Italian service sector performance increased in September to 44.5 from 44.0 in August. Analysts forecast no change. Although the rate of decline was the slowest for eight months, it still indicates contraction.
5. German Factory Orders: Tuesday, 11:00. Factory orders in Germany dropped unexpectedly by 1.3% in August, following a 0.3% rise in July.Germany’s economy is starting to feel the effect of the EU debt crisis with slower domestic demand and weaker private sector. A smaller decline of 0.7% is predicted now.
6. US Presidential Elections: Tuesday-Wednesday. Barack Obama seeks a second term and is competing against Mitt Romney. The most urgent issue is the fiscal cliff – automatic tax hikes and spending cuts that will happen in 2013 unless both political parties reach a deal. The quality of the compromise and the time it will take to reach it depend on the result of the elections and will make a difference for the US economy and the whole world.  . Recent opinion polls show a very close race. There is a small chance that Obama will win the elections through the electoral college without winning the popular vote. This could complicate matters regarding the cliff.  See how to trade the US Presidential Elections with EUR/USD.
   Update: Analyzing the wide market reaction to the NFP, an Obama victory could already be priced in, at least partially.
7. Retail Sales: Wednesday 10:00 Eurozone retail sales continued to improve in August rising by 0.1%, following a 0.1% climb in the previous month. Analysts expected retail sales to drop 0.1%. Despite the four consecutive monthly increases, the readings are poor, reflecting the high unemployment and uncertainty among European consumers. An increase of 0.5% is expected this time.
8. German Industrial Production: Wednesday, 11:00. German industrial productivity plunged 0.5% in August, due to a slowdown in the  construction  sector, from a 1.2% rise in the previous month, still showing resistance to the EU debt crisis affects with stable production. A drop of 0.9% is forecastetd.
9. Eurogroup Meetings: Thursday. Eurogroup Meetings attended by Finance Ministers from euro area member states, the Commissioner for economic and monetary affairs, and the President of the European Central Bank will meet in Brussels  to discuss the sustainability of the Greek debts as well as the plan to help other EU countries in recession. Last week’s conference call ended with no results, as Greek talks are stuck in the mud. Will something happen now?
10. Rate decision: Thursday, 12:45. Mario Draghi hinted about the danger of deflation in the euro-zone. Together with a small slide in inflation,  the worsening economic situation, also in Germany, and fear of another credit crunch, there is some chance that the ECB will cut the rates by 0.25% in the upcoming meeting. As long as Spain does not ask for a bailout, the OMT cannot be used to buy bonds. Another LTRO program to lend out money to banks could backfire once again and also buying bonds via the SMP without “conditionality” would be politically difficult at the moment.  Officially, no change is expected, so a  rate cut could weaken the euro
11. French Industrial Production: Friday, 7:45. French industrial output edged up 1.5% in August beating predictions for a 0.2% fall. The possible cause for this sharp increase in production is the fear of manufacturers from possible future strikes by trade unions. The Automobile industry expanded production by 9.9%. A decline of 0.9% is predicted now.
12. Italian Industrial Production: Friday, 9:00.Italy’s industrial production surprised analysts by rising 1.7%, contrary to predictions of a 0.2% decline in August and following a 0.1% drop in July. On a yearly basis, production slowed down by 5.2%, less than the expected decline of 9.7%. A drop of 0.6% is anticipated this time.

EUR/USD Technical Analysis

€/$ started the week trading above 1.2880 and along the uptrend support line (mentioned last week). It then moved higher and also temporarily flirted with the round 1.30 line, before beginning to descend. A late and strong fall sent the pair below uptrend support and all the way down to 1.2821 before closing at 1.2830.

Technical lines from top to bottom:

The round level of 1.34 is a strong cap after serving as such during March. 1.3290 worked as resistance for the pair during April and is also of importance.

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. 1.28 is the bottom border of the range, and it is close now. The pair fell to this low in September and later got close to it. A loss of this line will send the pair to a two month low.

1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is weaker now.  1.2670 was a double bottom during January and was the high line of the recovery before the Greek elections in June. It also capped the pair at the beginning of July 2012.

1.2590 was a cap during August, before the pair surged. The last line for now is the round number of 1.25.

Uptrend Support Broken

EUR/USD broke below uptrend support late in the weak, and is more vulnerable now. Both downtrend resistance and uptrend support were formed early in September. This adds to the bearish sentiment, that could result in the loss of critical support rather than a bounce at this point.

More technical analysis:  EUR/USD Extends Bearish Retracement