Search ForexCrunch

Euro/dollar had another volatile week, in which hopes switched to growing fear about the banks. The upcoming week consists of many important surveys. Here is an outlook for the upcoming events, and an updated technical analysis for EUR/USD.

Merkel and Sarkozy didn’t provide the eurobonds that many had wished for. Nevertheless, the euro enjoyed the continued bond buying of Italian and Spanish bonds by the ECB – currently  sterilized  – meaning no euro printing. This is quite positive for the currency. And then, growing fears about banks (some leveraged close to Lehman), together with bad figures from the US, sent stock markets lower and also weighed on the euro. This action is expected to continue.

EUR/USD daily chart with support and resistance lines on it. Click to enlarge:EUR/USD Chart August 22 26 2011

  1. Flash PMI: Tuesday – begins in France at 7:00, continues in Germany at 7:30 and ends with the all-European data at 8:00 The last purchasing managers’ indices in Europe were terrible – they all pointed to a significant slowdown. The manufacturing sector is weaker than the services one. It is too close to the critical 50 point mark. Any drop of any of the 6 indices under 50 will weigh on the euro. A score under 50 means economic contraction. 5 indices are expected to remain above 50, while the all-European manufacturing sector index is predicted to dip just below this figure.
  2. German ZEW Economic Sentiment: Tuesday, 9:00. This is one of the most important surveys in Germany, and it tends to be pessimistic. In the past two months, it dipped back to negative numbers, reflecting pessimism. The survey of 350 analysts and investors is set to send the score even lower than last month’s -15.1 points and fall to -24.3 points. The all-European (yet less important) figure is expected to remain around last month’s -7 points.
  3. Consumer Confidence: Tuesday, 9:00. This official from Eurostat isn’t much better. According to the latest release, consumers in the euro-zone are slightly more pessimistic, with the score falling to -11. -12 is predicted now.
  4. German Ifo Business Climate: Wednesday, 8:00. Contrary to the ZEW survey, this business sentiment indicator tends to be optimistic. But also this one probably feels the slowdown in Germany. It also fell last month unexpectedly from 114.5 to 112.9 points. Another small drop is expected now in this all-important indicator – to 111.4 points.
  5. Industrial New Orders: Wednesday, 9:00. After a few disappointing months, the value of orders in the manufacturing sector jumped by 3.6% last month, helping the euro. A small rise of 0.7% is expected now.
  6. NBB Business Climate: Wednesday, 13:00. Although coming from a small country, this wide Belgian survey is of high importance. In the past three months it has been negative, reflecting worsening conditions. A drop from -2.5 to -3.1 points is expected now.
  7. GfK German Consumer Climate: Friday, 6:00. The last survey of the week relates to consumers. While a drop was recorded also here last month, this indicator is still strong with a score of 5.4 points. A small drop to 5.2 points is likely now.
  8. M3 Money Supply: Friday, 8:00. The pace of growth in money supply is another way to measure inflation, which is easing. The pace recorded last month was 2.1%. A similar number is predicted now.

* All times are GMT.

 EUR/USD Technical Analysis

Euro/dollar made an upwards move at the beginning of the week, but struggled with the 1.4450 line (discussed last week). It then managed to break higher and was capped by 1.4520. Things changed from there, with the pair falling to support at 1.4282.

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. 1.4520 is the next significant level below. It capped the euro just now, and also had a similar role in the past.

The resistance line of 1.4450, proved once again its extreme importance, in capping a rally attempt, and being a distinct line between ranges. 1.4350 is the next line, after working very nicely in both directions very recently.

The peak of November 2010 at 1.4282 is is still with us as usual. While this line works better as resistance than as support, it was doing a great job in providing support now. 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.

Narrowing channel

A new narrowing channel is available on the chart. Downtrend resistance begins at the end end of June and is quite moderate. Uptrend support begins from the swing low in July and is more sharp.

I remain bearish on EUR/USD.

In the ugly contest between the euro and the dollar, the dollar is still a safer haven, especially regarding the situation of the banks. Both sides are racing to the bottom in terms of growth. Regarding inflation, it is picking up in the US while slowing down in Europe.

Further reading: