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EUR/USD  certainly enjoyed the surprising NO Taper decision by the US Fed, and jumped to a much higher range. Can the momentum continue as the focus shifts back to Europe? German Federal Elections, Flash PMIs and Draghi’s speech are the main events this week. Here is an outlook on the market-movers ahead and an updated technical analysis for EUR/USD.

Ben Bernanke and his colleagues surprised with the decision  NOT to taper QE. This boosted EUR/USD to levels last seen in February as the dollar retreated. Germans go to vote this week vote in federal elections, where Angela Merkel is expected to be reelected. However, she might have to settle for a grand coalition with the opposition rather than see a repeat of the current government, and this might cause uncertainty.  German economic sentiment jumped  from 42.0 to 49.6 points in August to the best level  since April 2010, further evidence to the pick-up in the Eurozone.  Let’s start.

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EUR/USD daily graph with support and resistance lines on it. Click to enlarge:EUR USD Technical Analysis September 23 27 2013 forex trading fundamental outlook and sentiment currencies

  1. German Federal Elections:  Sunday, results expected before markets open.  A  German federal election  will determine the 598 members of the 18th  Bundestag, the main federal legislative house of Germany. Germans pick a constituency candidate with their first vote, and the second vote determines the relative strength of the parties in the Bundestag. Angela Merkel, whose conservative bloc constitutes around 40% seats, needs the FDP to do well in the federal vote to avoid having to turn to the opposition Social Democrats (SPD). A grand left-right coalition is desired by many voters, but such a government could prove unstable.
  2. Mario Draghi speaks:  Monday, 9:00.   ECB President Mario Draghi   is scheduled to speak at the Committee on Economic and Monetary Affairs, in Brussels. His words will cause volatility in the markets.Draghi was very careful about the euro-zone recovery  and called it “green”.
  3. Flash PMIs:  Monday. Manufacturing and services Purchasing Managers’ Index (PMI) releases continued to rise in the euro-area in August. German manufacturing sector improved to 52, from 50.7 in July, while analysts predicted an increase to 51.1.  German services PMI advanced to 52.4 in the month, after an expansion of 51.3 in the previous month. Analysts expected a reading of 51.7. French manufacturing remained unchanged at 49.7 during August from the previous month. Regarding the services sector, PMI declined to 47.7, from 48.6 in July. Flash manufacturing PMI in the euro zone picked up to 51.3 in August, from 50.3 in July, while the flash services PMI flipped to expansion, reaching 51.0 in the month, from 49.8 reported in July. All in all, the Euro-area gained momentum in August with a two-year high expansion rate. Pick-up is expected to continue in the euro-area: French manufacturing sector is expected to reach 50.2, while services are climb to expand to 49.3. German Manufacturing is expected to edge up to 52.3, and Services to 53.2. The Eurozone manufacturing is expected to expand to 51.8 while services are expected to rise to 51.1.
  4. German Ifo Business Climate:  Tuesday, 8:00. The German Ifo Business Climate index  advanced to 107.5 in August, up from 106.2 in July, rising above the 107.1 expected by analysts. Optimism among companies on future business developments increased indicating,  German business activity picks up pace. Companies increase their investments, which is a good sign for next year’s growth rate. A further increase to 108.4 is forecasted.
  5. Belgium NBB Business Climate:  Tuesday, 13:00. Business confidence in Belgium, made a noticeable improvement in August, rising to -8.6 points from -12.0 in July. The reading surpassed predictions for a -11.1 reading. This reading crossed the -10 line, separating between growth and no growth, for the first time in two years. This is another good sign that the Euro zone is improving. Business confidence in Belgium is expected to further improve to -7.1.
  6. GfK German Consumer Climate:  Wednesday, 6:00. German consumer confidence declined slightly to 6.9 in August, from 7.0 in July, but remained close to its highest level in nearly six years. Analysts expected a small rise to 7.1but consumers appeared to be less optimistic, regarding inflation and the economic outlook despite encouraging data showing a boost in growth in the second quarter. A small rise to 7.1 is anticipated this time.
  7. M3 Money Supply:  Thursday, 8:00. The amount of domestic currency in circulation in the euro area fell less-than-expected in July, reaching 2.2% from 2.4% in the previous month, while analysts expected a drop to 2.0%. Loans to private sector narrowed by 1.9% on a yearly base in July, faster than a 1.6% decrease in June.  Lending for house purchase, the most important component of household loans, increased 0.7% year-on-year. An increase to 2.3% is expected.
  8. German CPI:  Friday. Consumer prices in Germany remained unchanged in August, and the annual rate is expected to reach 1.5%. Prices were driven mainly by food and alcohol and tobacco prices. Energy also added upward price pressure to the index, making an annual 0.4% contribution. Overall services inflation was recorded at a an annual rate of 1.6%. CPI is expected to remain unchanged now.
  9. French Consumer Spending:  Friday, 6:45. French consumers spent less in June following May’s boost in consumption. French consumer spending declined 0.8 % in June mainly due to reduced energy spending as the weather got better after a cold May. Analysts expected a slight rise of 0.1% in June. Overall, consumer spending advanced 0.3% in the second quarter, amid higher energy spending but still going in line with government forecasts that the economy may have exited a shallow recession. Another rise of 0.1% is anticipated.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week with a gap above the 1.3325 line (mentioned  last week). This line quickly switched to support. After the big surprise, the pair shot higher and reached 1.3570 before stabilizing in range above 1.35.

Technical lines from top to bottom:

We start from much higher ground this week. 1.3940 was a peak in September 2011, two years ago, and is just before the round number of 1.40. 1.3870 capped the pair during the fall of 2011 and served as the “shoulders” in a H&S pattern.  1.38 is a round number and also worked as a temporary cap during that period of time.

1.3710  was the 2013 peak, and is getting closer. The line is the next big target.1.3650 temporarily capped the pair during that period of time.

1.3570  is the swing high of September 2013 and is the initial line of resistance now.  1.35  is a nice round number that also served as support after the big No-taper surge.

1.3450 was a peak during August 2013 and serves as minor support.  1.3415  was the peak back in June and works as another line of support.

1.3325  worked as a double top in early September and it was crossed only with a Sunday gap. It remains a clear separator of ranges.  It is followed by 1.3240, which capped the pair in April and also had a role in August. It worked as support in September.

1.3175  capped the pair during July 2013. 1.3100  is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July and providing support in September.

It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, but it is less significant now.  The very round  1.30  line was a tough line of resistance. In addition to being a round number, it also served as strong support and recently worked as a pivot line.

Broken uptrend resistance

The line accompanying the pair since early June was broken by the big surprise. This can serve as a bullish sign.

I turn from neutral to bearish on EUR/USD

The dust is now settling from the big NO Taper surprise (see a round up of all the event) that knocked down the dollar. However, fresh comments show it was a close call and that an “Octaper“ could be on its way. The reaction in the euro was somewhat strong.

In the euro-zone, the recovery is green and fragile. A stronger euro can hurt this recovery. More importantly, the German elections pose a risk: unless the current CDU/CSU/FDP coalition wins a majority like now, Germany will enter a period of uncertainty regarding the new government. Eventually, the leading scenario is for a grand center-right / center-left coalition led by Merkel.  This grand colation could be more pro-European, but not necessarily pro higher euro  and not necessarily stable. We could see the pair retrace now.

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