Euro/dollar eventually climbed in the wide range, as positive German data and US weakness countered worries about Spain. The upcoming week will provide a forward looking view of the economy via the PMIs and a test of the debt crisis with an Italian bond auction among other events. Here is an outlook for the upcoming events and an updated technical analysis for EUR/USD.
German surveys have been upbeat, while Spain and Italy continue struggling in finding a path for growth while lowering the debt. Will the north pull the south forward, or will the south drag the north down? In the US, A second week in a row of high jobless claims cast serious worries that the slowdown isn’t so temporary. We will see what policymakers think about it.
Updates: EUR/USD gaps lower at the open as the first round of French presidential elections leaves a lot of room for uncertainty. Socialist challenger Francois Holland did quite well, and he has called for a renegotiation of the Euro-zone fiscal agreement, in order to encourage growth. Monday morning started with a host of releases today out of the Euro-zone, France and Germany, with many falling below the market forecast. French Flash Manufacturing PMI came in at 47.3, exactly as predicted. However, both the German and Euro-zone Flash Manufacturing PMI were below the market prediction. Euro-zone Flash Services PMI posted a reading of 47.9, slightly below the market forecast. German Flash Services PMI came in at 52.6 almost matching the market forecast. French Flash Services PMI was the biggest disappointment, as it dropped to a six-month low. The index came in at 46.4, well below the market forecast of 50.3. EUR/USD continues to slide, trading at 1.3137. Euro-zone Industrial New Orders were a major disappointment, posting a reading of -1.3%. The markets had predicted a rise of 1.4%. The Dutch government handed in its resignation on Monday, after failing to reach agreement on a budget to bring its deficit within EU limits. The election could be a referendum on the Netherland’s relationship with Europe, and put further strain on the Euro. In the short-term, the political uncertainty threatens to undermine the Netherland’s AAA rating. ECB President spoke before the European Parliament earlier today. German 30-y Bond Auction released figures of 2.41|1.1, compared to last month’s reading of 2.62|2.1. Government auctions in Spain and Italy are worrying the markets, due to the very high borrowing costs these two countries are now facing. EUR/USD continues to test the 1.32 level, trading at 1.3202. Following the announcement by the Federal Reserve to maintain very low interest rates for the foreseeable future, and weak US Core Durable Goods, the euro moved higher against the dollar early on Thursday. However, the pair has since given up most those gains, and is trading at 1.3214. We could see some movement by EUR/USD after the release of two key releases in the US on Thursday- Unemployment Claims and Pending Home Sales.
- French Presidential Elections: Sunday. The first round of the presidential elections is expected to send the two leading candidates to the second round: incumbent Nicolas Sarkozy and socialist opposition leader Françios Hollande. The latter is expected to win in the second round held on May 6th. There is a slim chance that Sarkozy will come in only third after right wing leader Marine Le Pen. In this case, Hollande’s victory in the second round will be almost certain. Hollande is seen as less pro market than Sarkozy, and not committed to the fiscal compact. His election can complicate matters within the euro-zone. Update: Hollande is first, Sarkozy is second in the elections. Both will battle for the presidency on May 6th, as expected. The results show that Hollande’s chances of becoming the president are very high.
- Flash PMIs: Monday, begins at 7:00 in France, continues at 7:30 in Germany and ends with data for the whole euro-zone at 8:00. Purchasing managers’ indices disappointed last month, especially in the manufacturing sector. In France, the services sector is just above 50 points, finely balanced between growth and contraction. A small rise is expected in both sectors. Germany’s contracting manufacturing is in line with the whole continent, but services are growing nicely, with the score at 52.1 points. The diversion between the sectors will likely remain unchanged, but both are expected to tick up. For the whole continent, both sectors aren’t expected to return to growth this time, but rather only edge up marginally, with the services sector reaching 49.4 points. The release of this bulk of forward looking indicators promises a strong start to the week.
- Industrial New Orders: Tuesday, 9:00. This is quite a volatile indicator, which behaved like a see-saw in recent months. A rise of 3.5% was followed by a drop of 2.3%. A rise is predicted this time. A second month of drops can hurt the euro.
- Belgian NBB Business Climate: Tuesday, 13:00. This is a wide survey coming from a small country. After a few months of rising scores, sentiment fell once again. It dropped from -7.7 to -9.6 points. The negative score means deteriorating conditions. A rise to -7.5 is predicted now, similar to two months ago.
- Italian Bond Auction: Thursday morning. Italy and Spain are at the epicenter of the debt crisis. Funding for short term bonds is easy thanks to the ECB’s LTRO, which enables arbitrage. However, benchmark 10 year bond auctions are a different story, especially as the secondary market shies away from them. Higher yields with a good cover are expected, like in Spain’s closely watched auction.
- German CPI: Thursday, throughout the day. The German Bundesbank still has very strong influence in the ECB, and any signs of inflation in Germany can deter the central bank from more loose policy. A stronger rise than last month’s 0.3% figure is predicted.
- German GfK Consumer Climate: Friday, 6:00. After reaching 6 points, this 2000 strong survey ticked back to 5.9 points. No change is expected now, yet a rise to 6 points will be in line with German strength seen in business surveys.
- French Consumer Spending: Friday, 6:45. Europe’s second largest economy saw a big rebound in consumer spending after many underwhelming months. The leap of 3% will likely be followed with a correction: a drop of 1.2% is estimate.
* All times are GMT
EUR/USD Technical Analysis
€/$ started the week with a negative tone: the pair dipped under the round line of 1.30 (mentioned last week), but didn’t get too far. Also the break under uptrend support proved very short lived. It then changed course, hitting the 1.3165 line twice before a third attempt succeeded. The pair closed at 1.3218, just above the 1.3212 line. This break isn’t confirmed yet.
Technical lines from top to bottom:
1.3615 is a high line which worked in both directions in the fall of 2011. Hints about QE3 could send the pair there, but this is highly unlikely. 1.3550 capped the pair in November and December and marked the beginning of the plunge.
1.3486 was a distinctive double top in February 2012 and is a strong cap. It’s closely followed by minor resistance at 1.3437. The pair struggled there when it traded higher.
The round number of 1.34 is now the top border of the wide range. It capped the pair in the most recent surges. The next line below is round as well:, 1.33 was tough resistance 4-5 times, with two attempts very recently. It remains key resistance.
1.3212 held the pair from falling and switched to resistance later on. It proved itself as resistance once again in April 2012. This was the bottom border of tight range trading in February. It is now pivotal. 1.3165 is now of higher importance. The line provided some support in December 2011 and worked as resistance in April 2012. It is a bit weaker now.
1.3110 is another minor line that capped the pair in January and later in April 2012. 1.3050 worked as support in April 2012 and also in March, and is the last frontier before 1.30.
The round number of 1.30 is psychologically important and proved to be a place of struggle. The failure to breach it in April 2012 showed its strength once again.
The 1.2945 line is stronger once again and still provides support. 1.2873 is the previous 2011 low set in January, and it returns to support once again. This is a very strong line separating ranges.
1.2760 is a pivotal line in the middle of a recent range. It provided support early in the year. 1.2660 was a double bottom during January and the move below this line is not confirmed yet. 1.2623 is the current 2012 low, but only has a minor role now.
As you can see in the chart above, the trading range of the pair is narrowing down. Both lines began in February, with uptrend support being more significant than downtrend resistance. A breach below this line was very temporary in its nature, and eventually the pair is back in the middle of the range.
In addition, here is a recent Elliott Wave Analysis of the pair, which points to low ground.
I am bearish on EUR/USD
While Germany’s economy seems strong once again, the crisis in Europe’s larger peripheral countries is far from resolution. The PMIs will likely provide a stark reminder. Also the French presidential elections may weigh on the euro, as power within the continent shifts.
The pair is now in the middle of the wide 1.30 – 1.34 that characterized it in the past month, and also in the middle of the channel. It has more chances of falling within the range than rising also without any disasters in Europe. High hopes for QE3 hints in the US will likely be met with a disappointment, and not for the first time.
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