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Euro/dollar  enjoyed the new hope for a big plan to resolve the crisis. The upcoming week is very busy, and consists of a rate decision and yet another European Summit. Will this one be different? Here is an outlook for the upcoming events, and an updated technical analysis for EUR/USD, now on higher ground.

6 central banks coordinated to cut US dollar swaps by 50 basis points. This provides some relief for the troubled European banks, but doesn’t solve Italy’s big problem: high costs for debt. Many ideas are floating, but there’s only one player that is able to provide a game changing move: the ECB. Will it finally act?

Updates: According to one report, the ECB is preparing a €1 trillion fund for this. There’s no confirmation. France and Germany reached an agreement about changes to the EU Treaty. This sent the euro higher, but the rise was limited and the pair remains in the 1.3420 – 1.3480 range. S&P warned all euro-zone nations about their credit ratings. This includes Germany’s perfect rating and also France, which got a two-notch warning. EUR/USD is in lower ground, but didn’t collapse. A senior German official expressed pessimism about the EU summit. In addition, the situation of European banks remains worrying, and the Greek bank run intensifies. EUR/USD is down to just above the 1.3360 line. Draghi cut the interest rates, announced big liquidity measures but clearly denied any form of QE, not direct nor circular through the IMF. Hope seems lost for the EU summit, and EUR/USD is down to 1.33, EUR/USD fell even lower on the weak results of the EU summit, but hopes for Chinese aid and some flexibility from the Bundesbank helped the pair recover once again.

EUR/USD graph with support and resistance lines on it. Click to enlarge:EUR/USD Chart December 5 9 2011

  1. Final Services PMI: Monday, 9:00. The services sector is contracting for a third month in a row. The initial release of the purchasing managers’ index showed some recovery of the figure to 47.8 points, still in negative territory. This will likely be confirmed now.
  2. Sentix Investor Confidence: Monday, 9:30. This wide and reputable survey of 2800 investors has deteriorated once again last month, falling to -21.2 points. The negative number reflects pessimism. It is expected to tick down to -21.4 points now.
  3. Retail Sales: Monday, 10:00. The figure for the whole continent is published after Germany already released its own figure. Nevertheless, it still has a strong impact on the euro. After a drop of 0.6% last month, a small rise of 0.2% is expected now.
  4. Revised GDP: Tuesday, 10:00. Q3 could be the last quarter of growth before the recession expected in Q4. The initial, flash release has shown growth of 0.2%, and a confirmation of this number is likely now. Note that Germany and France grew at a higher pace, while the smaller countries lagged.
  5. German Factory Orders: Tuesday, 11:00. Europe’s economic locomotive has disappointed badly in this indicators. The volume of orders fell for three consecutive months. The plunge of 4.3% recorded last month was a big blow to the single currency. A correction is predicted now, with a rise of 1%.
  6. German Industrial Production: Wednesday, 11:00. Industrial output provides another view on German manufacturing. Also here, last month was weak, with a drop of 2.7%, and a correction is expected: +0.3%.
  7. Rate decision: Thursday, 12:45. Press conference at 13:30.  The European Central Bank will likely reduce the interest rate by 25bp for a second time in a row and set the Minimum Bid Rate at 1%, back to the pre-hike era. While inflation still remains elevated, more indicators point to a recession already ongoing in Europe right now. Mario Draghi already mentioned a mild recessionin its previous statement. A rate cut will help the struggling economies. He might introduce additional measures to help banks which are suffering from funding constraints. The LTRO programs may be expanded.
    The world expects more from the ECB: massive bond buying in a manner that will send Italian yields plunging lower, in a US/UK Quantitative Easing style. I think that such a move will eventually happen, but without an announcement, at least not in the scheduled press conference.
  8. French Industrial Production: Friday, 7:45. Europe’s second largest economy was also weak with a fall of 1.7% in the level of its output. Here, the correction is expected to be only a stop of the falls, but with no gain.
  9. EU Summit: Friday. This summit is a critical one, after previous accords have failed. Some say that this is the last chance to save the euro-zone. The leaders will try to push through higher economic integration: selling common eurobonds, moving towards a fiscal union and other ideas are on the cards. Any changes, even if they are made through a fast lane, will take time to implement. In the meantime, yields on Italian bonds are just too high, and the ECB is needed in order to stop the rout. Using the IMF is also an option that is gaining more and more traction. The numbers that were rumored so far are in the hundreds of billions of euros, and this may prove insufficient. A multi-trillion impressive move is needed.

* All times are GMT.

EUR/USD Technical Analysis

Euro/dollar traded in low levels in the first half of the week. It then jumped and re-entered the wide 1.3420 – 1.3550 range (mentioned last week). After failing to break higher, the pair fell back and eventually closed at 1.3392.

Technical lines from top to bottom:

The round number of 1.38 is a minor line of resistance, capping a recovery attempt in November. 1.3725 worked as support several times in October and served as a pivotal line in the range.

A strong line is 1.3650, which worked quite well in recent weeks, and was only temporarily breached. It is one of the more distinct lines in the range. Next we have a tough line: 1.3550 provided support early in September and then switched to resistance after the fall. It proved it can work as good resistance as well, as seen after the Non-Farm Payrolls.

1.3480 is more minor now after being a pivotal line in the range. It also had a role in September. The 1.3420 line held quite well, and when this bottom border of the range was broken, it  immediately  switched to resistance – a distinct line separating ranges.

The level of 1.3380 is the next line. It is a minor pivotal line now. 1.3320 is a support line, that held the initial drop of the euro. More important support is at 1.3212 which held the pair just now.

Very important support is at 1.3145 which is the lowest point seen in the current round of the crisis. It is closely followed by 1.3080, which provided some support when the pair was range trading at the end of 2010.

The round number of 1.30 is psychologically important, before the low of 1.2873 seen early in the year. This year to date low is of high importance.

Below this line, it’s back to 2010. 1.2737 worked as support several times in the past. 1.2587 was the trough seen in the autumn of 2010 and is a key line.

Downtrend channel broken

A sharp and narrowing downtrend channel can be seen on the graph. Downtrend resistance begins at the end of October but is broken now. Downtrend support was formed later on but is more distinct – it wasn’t violated.

I am bearish on EUR/USD

Hopes towards the summit can remain high through the week, but the choices are not pretty. Fiscal integration cannot be realized quickly. The ECB can definitely stabilize the situation by buying bonds en masse. If this happens in the desired scale, the central bank will not be able to drain the money out of the markets, and this will turn into a full QE program that will weaken the pair. Cracks in the ECB’s sterilization program were already seen. If the ECB isn’t utilized in such a manner, the bond rout will continue, with a danger that Italy loses access to the markets. Italy is too big to bail, and even German bonds are not safe anymore.

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