After riding on more hawkish comments regarding the interest rate and the greenback’s weakness, the Euro faces a very busy week, with the rate decision being the climax. Here’s an outlook for the European events and an updated technical analysis for EUR/USD.
The civil war in Libya is disrupting oil supply. Despite the small quantity of oil it produces, Libya’s proximity to Europe and the quality of crude it produces, the crisis sends oil prices higher, lowering the dollar across the board. Will this trend continue?
EUR/USD chart with support and resistance lines marked on it. Click to enlarge:
- German Retail Sales: Publication time unknown at the moment. Europe’s largest economy has undergone a squeeze in this important consumer related figure. This disappointment will probably be followed by a correction this time.
- CPI: Monday, 10:00. Inflation is on the rise, and the ECB is taking notice of this, with seniors hinting of a rate hike. According to the initial report for January, prices rose at an annual pace of 2.4% in January. This will probably be confirmed now. Core CPI, which excludes the rise in oil prices, will probably be confirmed at 1.1%.
- German Unemployment Change: Tuesday, 8:55. After a month of a rise in unemployment, it returned to falling last month, showing that Germany’s economy is strong. A drop of a higher scale than 13K seen last month will probably be reported now.
- Final Manufacturing PMI: Tuesday, 9:00. The Euro-zone’s manufacturing sectors are doing well – growth is strong, at least according to the initial release, that printed 59 points. This is likely to be confirmed now.
- CPI Flash Estimate: Tuesday, 10:00. Just one day after the CPI numbers for January are finalized, we’ll get the initial numbers for February. Given the rise in oil prices, the consumer price index will probably rise by more than last month’s 2.4%. Core CPI will probably stay just above 1%.
- Unemployment Rate: Tuesday, 10:00. This is the main factor that could prevent a rate hike in Europe. The total unemployment rate stands at 10%, and has hardly changed in the past year. Spain’s unemployment rate is above 20%. No change is expected now, but the figure will probably weigh on the euro.
- PPI: Wednesday, 10:00. Despite being released after the CPI, the producer price index is still important, and isn’t overshadowed by any other figures. After a rise at annual pace of 0.8% last month, a rise of over 1% is due now.
- Final Services PMI: Thursday, 9:00. Although not as strong as manufacturing, the purchasing managers in the services sector are also showing growth. The initial release that printed 57.2 points will probably be finalized now.
- Retail Sales: Thursday, 10:00. Following Germany’s lead, the whole Euro-zone’s sales dropped by 0.6% last month. Also here, a correction is expected with a rise of a similar scale.
- Revised GDP: Thursday, 10:00. Though somewhat overshadowed by the retail sales figure, GDP is still important. The initial, flash release showed a rise of 0.3% in Q4. Expectations were for a rise of 0.4%.
- Rate decision: Thursday, 12:45. Trichet, Mersch and Smaghi have all pledged to control price stability and to fight inflation. They disregard the fact that inflation is imported, and not domestic. Nevertheless, the language at last month’s decision shows that the hike won’t come now. The critical part is the press conference, due at 13:30 GMT. If Trichet keeps the same tone as last time, “closely monitoring”, the euro will fall. If he raises his tone and uses words like “alert”, the euro may rise.
EUR/USD Technical Analysis
Euro/Dollar started the week with a struggle around the 1.37 line discussed last week, before taking a quick dive down and back back. When 1.37 was conquered, the pair also crossed the 1.3760 line, but eventually closed just below it, at 1.3750.
Looking up, immediate and very close resistance is found at 1.3760. This will be a critical line at the beginning of the week. It’s followed by 1.3860, which serves as a strong resistance line – the highest level this year.
Moving higher, 1.3950 was a pivotal line when the pair was trading higher, and has the same role now. Just above the round figure of 1.40, 1.4030 served in both directions during September and October, and also beforehand. It’s a tough line.
Higher, the peak of 1.4160 is another minor line before 1.4280 that is the highest level in a year and is still in the distance.
Looking down, 1.37, switched its role and now works as support, just as it did now. Below, 1.3570, a line which worked in both directions in recent weeks now provides the next line of support.
Lower, a stronger line appears – 1.3440 which was a very stubborn peak in the past three months now works as support. An attempt to dip below this line failed. Further down the road, 1.3334, a peak during the summer, is a minor support line.
It’s followed by 1.3267, another minor line, that worked as support a long time ago, and is still of importance. Lower, important support is found at 1.3180, which provided support during December. It’s followed by 1.3080, that prevented a full during the same period of time.
I am neutral on EUR/USD.
The Euro has enjoyed the Libyan crisis and the soaring price of oil, that weakens the dollar. It is likely to get a boost by tough anti-inflation language at the ECB rate decision. In the long run, the debt crisis is about to erupt at any moment, as the new government in Ireland will try to renegotiate the terms of the bailout and other troubled countries face hard times in raising money. Volatility has definitely risen.
This pair receives great reviews on the web. Here are my picks:
- IGMarkets write about the impact of oil on currencies, even with talk about raising rates in Europe.
- James Chen analyzes how EUR/USD retreats from resistance.
- Sophia, on Casey’s site, discusses the defiant Euro.
- Kathy Lien explains why higher oil is negative for the dollar.
- TheGeekKnows writes a review of the past week looks forward.
- Andriy Miraru provides weekly support and resistance lines for major pairs, including EUR/USD.
- 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 Zealand dollar (kiwi), read the NZD forecast.
- For USD/CAD (loonie), check out the Canadian dollar.