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The Euro can thank Bernanke for another great week. The focus will shift towards the Euro – a busy week is expecting us, with Trichet’s rate decision press conference being the best show in town. Here’s an outlook for the events that will rock the common currency, and an updated technical analysis for EUR/USD.

The Euro is completely ignoring the situation in Greece: the debt laden country missed the deficit target, yields are rising, and Angela Merkel is already getting ready for a Greek default. When will this snowball begin rolling? Let’s start:

Update: The EU is already quietly working on a restructuring program for Greece.

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

EUR USD forex forecast May 2-6

  1. Final Manufacturing PMI: Monday, 8:00. According to the initial release, the Euro-zone’s manufacturing sector is growing at a strong pace. The score of 57.7 points will likely be repeated now.
  2. Jean-Claude Trichet talks: Monday, 9:00. The president of the ECB will be speaking in Frankfurt and may provide hints towards his next and more important appearance, after the rate hike.
  3. PPI: Tuesday, 9:00. Producer prices for the whole region are published after key states already released their own data. Nevertheless, with the growing importance of inflation, also this number is of importance. A small slowdown from 0.8% to 0.7% is predicted now.
  4. Final Services PMI: Wednesday, 8:00. The services sector has also seen growth pick up, at a marginally slower pace than the manufacturing sector. The score of 56.9 points will probably be confirmed now.
  5. Retail Sales: Wednesday, 9:00. The unexpected drop in retail sales (-0.1%) last month, has shown that consumers aren’t really confident.  A rise of 0.2% is likely now.
  6. German Factory Orders: Friday, 10:00. The past two months have seen excellent growth in the Euro-zone’s powerhouse. Growth rates of 3.1% and 2.4% aren’t expected to be seen now – only 0.4% is predicted. A drop in orders can weaken the Euro.
  7. Rate decision: Thursday, 11:45. The rate hike came last month, as expected. As hinted by Jean-Claude Trichet last month, another hike isn’t expected now. He used the code words “monitor closely” and not “strong vigilance” which is used for telling that a rate hike is expected in the next meeting. The focus will be, yet again, on the president of the ECB. In the press conference due 45 minutes after the decision, Trichet will explain the decision. Every word he says will rock the markets. Given the rise of inflation to 2.8% (according to the first release), there’s a good chance that he’ll say “strong vigilance” and hint towards a hike in June. In this case, the Euro will march forward.
  8. German Industrial Production: Friday, 10:00. The second German manufacturing related figure is also expected to slow down from the previous month, rising only 0.6%, after 1.6% last month.

* All times are GMT.

EUR/USD Technical Analysis

At the beginning of the week, Euro/Dollar struggled with the 1.4580 line (discussed last week) before making a move. 1.47 was the initial line of resistance, but after being broken, the pair surged and traded between 1.48 and 1.4882, closing just above 1.48.

Looking down, 1.48 is very close and provides immediate support, though quite week. It was a line of support back in 2009. Below, 1.47 just worked as resistance, the same as it did back in October 2009. It’s already a stronger line.

Below, 1.4650 was a peak recently, and now works as minor support. 1.4580, which capped the pair now, was also resistance in January 2010.

Moving lower,  1.4520, which switched its role from support two weeks ago, is a minor line of support. Stronger support is found at  1.4375  after working as such several times two weeks ago.

Even lower, the pair will meet the previous one year high of 1.4282, that was a very tough resistance line, and now works as distant support. Together with 1.4250, they form a region of support.

1.4160 proved to be the last frontier in the early collapse. It previously served as a was pivotal when the pair traded in the previous lower range.  An important cushion is at the 1.4030 line, which separated the different the different ranges Euro/Dollar traded in. There are many lines below, but they’re too far at the moment.

Looking up, the recent peak of 1.4882 serves as immediate resistance. It is the new 16 month high. The next  resistance line is just above the round number of 1.50,at 1.5020 – this line had the same role back then.  The ultimate line of resistance is the December 2009 peak of 1.5144.

Beyond this line, we’re back to the highs of the summer of 2008, when oil was even higher than now, when the Euro passed the 1.60 mark. 1.5250 will possibly be the first barrier if 1.5144 is broken.

I am bearish on EUR/USD.

QE2 Lite is definitely a blow to the dollar, but there are two factors that could weigh on the Euro. First, its strength. Trichet has many opportunities to express concern about the strength of the Euro this week. Second, the Greek default is getting closer, with Merkel preparing the public for it, and an EU / IMF delegation visiting Greece to see what’s going on, after the deficit target was missed again.

Here are some recommended reads about the Euro:

  • FX Tech Strategy sees a bullish Euro, with further strength ahead.
  • Adam Kritzer sees the dollar rallying when QE2 ends.
  • TheGeekKnows writes a review of the past week looks forward.
  • Andriy Miraru provides weekly support and resistance lines for major pairs, including EUR/USD.

And what if Greece leaves the Euro-zone? This could definitely boost the Euro.

Further reading: