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The Euro had an awful week, sliding almost 500 pips and losing critical support. The upcoming week is busy with important releases – the rate decision is the highlight. Here’s an outlook for the European events and an updated technical analysis for EUR/USD, now in lower ground.

The Euro was hurt by slow growth, worries about banks, rising yields for government bonds (already hurt Portugal’s auctions) and even the rising inflation doesn’t help the Euro, as unemployment seems to prevent raising the rates, at least now. Will the fall continue?

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

  1. French Industrial Production: Monday, 7:45. Europe’s second largest economy has seen a few months of disappointing results in this indicator, including an unexpected fall of 0.8% last month. A rise of the same scale is predicted now.
  2. Sentix Investor Confidence: Monday, 9:30. After a few months of improvements, this survey of 2800 analysts and investors made a big drop to 9.7 points last month. It’s now expected to recover and rise to 11.3 points.
  3. Industrial Production: Wednesday, 10:00.  This figure is released after the German and French publications. Nevertheless, it still has a strong impact on the Euro. A rise of 0.5% is expected now, very similar to the 0.6% increase seen last month.
  4. Rate decision: Thursday, 12:45. Jean-Claude Trichet’s headache is becoming stronger – inflation already crossed the 2% target, but the Euro-zone is hardly growing and unemployment remains high. There are higher chances for leaving the current Minimum Bid Rate unchanged once again at 1%, despite the rising prices. In his press conference, expected 45 minutes after the decision, he is likely to rock the markets with interesting statements regarding the fragile situation and the debt crisis.
  5. CPI: Friday, 10:00. According to the initial release, consumer prices are now rising at an annual rate of 2.2%, above target. This hasn’t happened in a long time. It will probably be confirmed now. Core CPI is expected to be confirmed at 1.1%.

EUR/USD Technical Analysis

An early attempt to break higher met the fierce 1.3440 level (mentioned last week). From there, it was all downhill. The Euro passed at the strong 1.2970 support line (a 4 month low) before losing even another line – 1.2920, and closing at 1.2904.

Looking up, 1.2920, which was a resistance line during the summer, returns to its role as such. Above, 1.2970 is a much more important line, after holding the pair a few months ago.

Higher, 1.3080 also turns from support to resistance. It prevented falls for many days in December. Above, 1.3180 is a minor line after capping the pair several time.

1.3334, which was a high point in the summer is the next minor resistance line. It’s followed by 1.3440, which worked many times as a very strong resistance line, including in the last week and throughout the third quarter. It also worked as support in the past.

There are many more lines above, which were discussed in previous weeks, but they’re too far now.

Looking down, immediate support is weak, and is only at 1.28. More significant support appears at 1.2722, which capped the pair in the summer, and later worked twice as support.

1.2587 is the lowest line in 6 months, and is another important line of support on the way down. It’s followed by 1.3467, wchih capped the pair when it was trading in a lower range, and provided support after it broke higher.

Below, the 1.34 line capped the pair as well, and is a minor line of support now. More lines far below worth mentioning are 1.2150, which was a very stubborn support line during May and June 2010. When this line was broken, the 2010 low was at 1.1876, the last line for now.

I remain bearish on EUR/USD.

Despite the extreme move in the past week and the weak Non-Farm Payrolls in the US, I believe there’s more room for drops, especially after critical support was lost. European debt issues are still with us, and we get a reminder with every bond auction. And in the US, most indicators show improvement.

Update: Reports about Germany and France pushing a bailout for Portugal will also weigh on the Euro.

Here are some recommended reads on EUR/USD:

  • Gergor Horvat follows up on the triangle formation in Euro/Dollar and marks a short opportunity.
  • James Chen sums up the firs week of EUR/USD trading in 2011 and marks the next levels.
  • Andriy Moraru marks levels for major pairs and sees more falls ahead.
  • Kathy Lien shows how EUR/USD seasonality works perfectly, at least up to now.
  • TheGeekKnows writes a review of the past week looks forward.

Further reading on Forex Crunch: