EUR/USD continued deteriorating and broke down to the lowest levels since November 2012. Is it getting close to the bottom or can we expect more falls? The keys are in the hand of Mario Draghi. Apart from the ECB meeting, we have inflation numbers as well as PMIs and other events. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
Also another German survey showed worse than expected business confidence. Preliminary PMIs were mixed but certainly unimpressive and Draghi joined in by reiterating that the ECB is ready to do more. Yet a big part of the move came from the other side of the Atlantic, as the US dollar continued forward, beating all its major peers. It was boosted by the highest new home sales in 6 years, as well as the expected upgrade to GDP. How will the pair fare in the new quarter?Updates:
EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- German CPI: Monday: states release data during the morning and the all-German number is released at 12:00. As the largest country in the euro-zone, Germany’s inflation numbers have a strong influence on the overall CPI and it has the strongest influence in the ECB. After remaining flat in August, a slide of 0.1% is expected for September. The y/y HICP is predicted to slide to 0.7% from 0.8% last month.
- Spanish CPI: Monday, 7:00. The fourth largest euro-zone economy is in outright deflation, seeing a y/y fall of 0.5% in prices in August. For September, a slide of 0.3% is predicted. The weakness in prices comes in contrast with the recent growth the country reported.
- German Retail Sales: Tuesday, 6:00. The volume of sales in Europe’s No. 1 economy plunged by 1.4% in July, and that was certainly a disappointment. A bounce back is expected now, by 0.6%.
- French Consumer Spending: Tuesday, 6:45. France releases data for two months: July and August. After a rise of 0.9% in June, both July and August are expected to suffer from drops in spending: 0.3% and 0.2% in Europe’s second largest economy.
- German Unemployment Change: Tuesday, 7:55. The number of unemployed in Germany disappointed with a rise of 2K in July. A reversal is predicted now: a rise of 2K. While unemployment is low in Germany, it hasn’t shined recently.
- CPI Flash Estimate: Tuesday, 9:00. The ECB’s mandate is to achieve an inflation level of 2% or “a bit below”, and the central bank is certainly missing on the target. After a revision, August’s inflation level was 0.4% y/y and this is expected to slide down to 0.3%. However, the weaker euro during September may have already had some influence on the data. Core inflation is predicted to remain unchanged, at 0.9%, also far below target.
- Unemployment Rate: Tuesday, 9:00. The unemployment rate in the euro-zone is very high: 11.5%, but it is off the peak of 12.2%. No change is expected now. The release will likely be overshadowed by the CPI data.
- Italian CPI: Tuesday, 9:00. The euro-zone’s third largest economy releases its inflation data at the same time as the all-European figure. After a monthly rise of 0.2% in August, a slide of 0.3% is predicted now. Also here, the number will need to be extremely out of sync with expectations in order to have an impact.
- Manufacturing PMIs: Wednesday: Spain at 7:15, Italy at 7:45 and EZ at 8:00. Spain is enjoying growth according to the PMI for August: 52.8 points, above the 50 point mark separating growth and contraction. A small slide to 52.3 points is expected now. In Italy, Markit sees marginal contraction: 49.8 points. This is expected to deteriorate to 49.4 points.
- Spanish Unemployment Change: Thursday, 7:00. Spain suffers from an extremely high unemployment rate and has a seasonal job market. After a rise of 8.1K unemployed in August, the end of the peak of the tourist season will likely result in a bigger rise in unemployment: 31.3K.
- PPI: Thursday, 9:00. Producer prices are weak, like consumer prices. After a slide of 0.1% in June, another slide of 0.2% is expected in July. This is before the recent big slide in the value of the euro.
- Rate decision: Thursday, 11:45. Press conference at 12:30. The ECB surprised with yet another round of rate cuts as well as a statement about a “sizable” ABS program. Since then, the first installment of the targeted loans came out poorly. On the other hand, the fall of the euro is certainly encouraging. No changes are expected in the interest rates, as they have reached their lower bound according to the Bank. However, we can expect more details on the ABS program and on expectations for the next TLTRO and a potential for QE to move the markets. It will be interesting to hear if Draghi expresses optimism about the euro area thanks to a better lending environment, the steps already taken and the lower euro, or if he continues expressing concern and readiness to do even more. This is the key topic. In the past, Draghi zig-zagged between optimism and pessimism, but on the other hand, he could take a page from the RBNZ’s book, and the hit the euro when it’s down and out.
- Services PMIs: Friday: Spain at 7:15, Italy at 7:45 and EZ at 8:00. Spain’s services sector enjoys rapid growth according to Markit: 58.1 points in August. A slide to 56.9 is expected now. Italy is expected to move away from the 50 point mark separating contraction and growth and slide from 49.8 to 49.6 points.
- Retail Sales: Friday, 9:00. Despite being released after Germany’s retail sales publication, this figure has an impact. After a drop of 0.4% in July, a rise of 0.1% is expected in August.
* All times are GMT
EUR/USD Technical Analysis
Euro/dollar started off the week with a failed attempt to reach the 1.2920 line mentioned last week. It then began deteriorating quickly and lost the critical double bottom line at 1.2750, reaching a 22 month low. Another dead cat bounce resulted in a slide to 1.2678, just above another important line: 1.2660.
Live chart of EUR/USD:
Technical lines from top to bottom:
We begin from lower ground this time. The round number of 1.31 served as resistance several times, and the all important figure below is 1.30, which is more than a round number.
Below 1.30, we find support at 1.2960 which capped the pair’s recovery attempts after it fell to lower ground. The 1.2920 level was the initial low and has now turned into strong resistance.
1.2860 a place where the pair stopped on the way down in September, and now has the opposite role. The round number of 1.28, which also worked as support at around the same period of time is yet another line of resistance.
1.2750 was the low where the pair traded last time it was around these levels: July 2013. This double bottom was breached and immediately worked as resistance. 1.27 is a round number and also worked as temporary support now.
This is followed by 1.2660 – a key line to the downside, which marks the beginning of long term uptrend support. Below, 1.2590 capped the pair back in August 2012 and serves as the last support line before the round number of 1.25, which is USD/EUR at 0.80.
Even lower, 1.2445 was a swing high in August 2012 and it is followed by 1.2385, which was stubborn resistance around the same time.
1.2250 served as support several times in that summer, and 1.2170 was the “shoulder” in the inverse H&S pattern around the same time. The last line is the 2012 low of 1.2040.
Here is a closer look at the recent trading levels, using the hourly chart:
Long term uptrend line clearly broken
After downtrend support was left behind, we are now reaching a much older line, which accompanied the pair since November 2012 and was touched twice in 2013 and since forgotten. The pair broke below the line, but managed to give another fight before totally collapsing.
I remain bearish EUR/USD
While there is a chance that inflation in the euro-zone will beat expectations due to the weaker euro and that the ECB may thus convey a positive message, the monetary policy convergence is clear and intensifying. With no growth, rock bottom inflation and with the poor TLTRO, the ECB will likely push forward and make it clear that it means business, thus hitting the euro when it’s down. On the other side of the Atlantic, a bounce back from last month’s weak NFP can meet the markets when expectations are low, thus providing another reason for the dollar to rally, as it seems unstoppable Where will the pair stop falling? The ECB will probably feel comfortable only around 1.20-1.25.
In our latest episode, we talk about Contango vs. Backwardation, Scottish reverberations and key US data:
- 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.