EUR/USD Outlook – August 15-19

Euro/dollar managed to remain at the same levels, but it was very very choppy. The upcoming week consists of important GDP and inflation numbers, important for the next rate decision. Here is an outlook for the European events, and an updated technical analysis for EUR/USD.

Trichet’s intervention in the markets finally came and helped the debt crisis get off the headlines, and helped the euro stabilize. Ben Bernanke helped in stabilizing as well, by pledging not to move the rates  for two years. Has the extreme volatility ended? Or is it around the corner?

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

1. German GDP: Tuesday, 6:00. After France published its GDP figures, Europe’s largest country and locomotive will be tested. Germany impressed by growing at a pace of 1.5% in the first quarter. It is clear that this pace didn’t repeat itself now. A growth rate too close to 0% will hurt the euro. This is the initial release, but rarely changes afterwards.
2. European GDP: Tuesday, 9:00. While the number for the whole continent is based on figures already released by most countries, this still tends to surprise and rock currencies. After a nice 0.8% rise in Q1 (thanks to Germany and France), a much lower growth rate is expected now.
3. Trade Balance: Tuesday, 9:00. The euro-zone’s trade deficit surprisingly squeezed below 1 billion last in May. Given the drop in Germany’s surplus, this deficit is set to widen now.
4. Current Account: Wednesday, 8:00. This indicator takes the goods (counted in the trade balance), as well as cash and services. Here, the deficit expanded to 5.2 billion last time, and is likely to further expand, weighing on the euro.
5. CPI: Wednesday, 9:00. The initial, flash release of the headline CPI figure dropped to 2.5%, and let the air out of the rate hike balloon. This will probably be confirmed now. The more interesting piece in this release is Core CPI, that currently stands at 1.6%. A rise will mean that commodity prices had “secondary effects” that necessitate action. A drop will also help forget about a rate hike in 2011.
6. German PPI: Friday, 6:00. Producer prices have stalled in the past two months, a result of the stall in commodity prices. The rise of 0.1% reported in June will likely be followed by the same marginal rise now.

* All times are GMT.

EUR/USD Technical Analysis

Euro/dollar started the week with an upside Sunday gap, but was capped by the 1.4450 line (discussed last week). It later fell and got support at 1.4160 and again at 1.4160. All in all, it remained in range.

Technical levels, from top to bottom

In case that the euro runs higher, 1.4940 is the highest level this year, and currently the final frontier. Minor resistance is at 1.4882, a peak that later worked as support.

1.4775 is a significant line in high ground, after being pivotal when the pair traded there. 1.47 follows as a minor line.

1.4650 was a peak in the past and is minor resistance. 1.4550 is already a stronger line beneath. It worked perfectly well when the euro attempted to run higher, and is a key level for an upside run.

The resistance line of 1.4450, proved once again its extreme importance, in capping a rally attempt. It’s closely followed by the round 1.44 line, which capped the pair just now, and replaces the 1.4375 line.

The peak of November 2010 at 1.4282 is is still with us, for yet another week. As this line works better as resistance than as support, it was doing a great job in capping the pair. 1.4220 was a pivotal line in the past week, the middle of the range between two stronger lines.

1.4160 returned to having an important role in supporting the pair, despite being breached. Moving lower, the round number of 1.41 provides stronger support now, after preventing a collapse.

Just above the round number of 1.40, we find very important support at 1.4030 – it was successfully tested earlier in the summer.  Lower, 1.3950 was a pivotal line when the pair traded in lower ranges and proved that it is of high importance. After the comeback, this line was another clear support line.

The bottom of 1.3838 will be closely watched in another fall. This was also a line of support last year. Below, 1.3750 is significant support, if the pair falls to a five month low.

Downtrend channel

Downtrend resistance has been broken two weeks ago and in the past week’s choppy trading, it was hit once again.

I turn from neutral to bearish on EUR/USD.

The bond buying scheme presented by Trichet managed to stabilize the Italian and Spanish fronts. It was so successful, that it might turn into a QE program, that will eventually hurt the euro. With flat French growth, easing inflation and some stability in the US, the pair has room for falls.

Further reading:

• 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.
• For the New Zealanddollar (kiwi), read the  NZD forecast.
• For USD/CAD (loonie), check out the  Canadian dollar
• For the Swiss Franc, see the  USD/CHF forecast.