EUR/USD Outlook January 16-20

Euro/dollar  had another roller coaster week which ended in a fresh 16 month low.The upcoming week features the important ZEW survey and inflation numbers in addition to other events. Here’s an outlook for the upcoming events, and an updated technical analysis for EUR/USD.

At first, things were looking good for the euro – the single currency enjoyed Draghi’s confidence regarding the success of the LTRO operation. The aversion of a credit crunch is far from certain, after Friday’s events. France lost its perfect AAA rating, together with other euro-zone countries. In addition, Greece is on the brink of default after the talks about a haircut broke down. Will the ECB replace the private sector and take a hit on Greek bonds? Greek banks are in worse shape than estimated. Together with the breakdown of Greek PSI talks, the Greek troubles are not priced in. While Germany and Spain look better (and this pushes the euro higher), Italy remains in trouble, Portugal moves closer to default and Greece is widely seen as defaulting.

Updates: EUR/USD managed to tick up above 1.2660, but it didn’t get too far. The new troubles are awaiting US markets, which are closed for the day. Euro/dollar continues north, enjoying the rise in Chinese GDP, a positive German ZEW sentiment and a good Spanish bond auction. The pair is within the 1.2660 – 1.2760 range. Strong Spanish and French auctions, together with hope for Greece, sent the euro above resistance.

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

1. German WPI:  Publication time unknown at the moment. Wholesale Price Index in Europe’s No. 1 economy has seen a surprising jump in prices last month, 0.7%. No change is expected now.
   
2. German ZEW Economic Sentiment: Tuesday, 10:00. This is one of Europe’s most important surveys. After 9 consecutive drops, this 350 strong survey finally stabilized, albeit at low ground. The score of -53.8 reflects deep pessimism and low expectations for the economy. A similar score is expected now. The less-important euro-wide figure will likely remain around -54.1 points seen last month.
3. CPI: Tuesday, 10:00. After a few stubborn months at 3%, the consumer price index dropped to 2.8% (annually) in the initial publication. This will likely be confirmed now. Core CPI will likely tick down from 1.6%. Note that the ECB pays less attention to inflation now, and focuses on growth and the debt crisis.
4. Current Account: Thursday, 9:00. Europe’s wide measure of the balance of goods, services, cash, etc. leaped  to a deficit of 7.5 billion euros last time. A smaller deficit is expected now.
5. ECB Monthly Bulletin: Thursday, 9:00. One week after the market moving rate decision, we will get to see the figures upon which policymakers were making their decisions. This will shed light on how the central banks sees the economy.
6. German PPI: Friday, 7:00. Producer prices in Germany have stabilized and rose by very small numbers of late. No change is expected after last month’s rise of 0.1%.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with a drop down to 1.2660, a new line that didn’t appear  last week. It then traded between this line and the 1.2873 cap before falling as low as 1.2623 but closed above the 1.2660 line.

Technical lines from top to bottom:

We begin from lower ground this time. 1.3212 held the pair from falling and switched to resistance later on.  Very important resistance is at 1.3145 which was the lowest point recorded in October 2011, was only broken for a short time from the other side.

1.3085 was the top border of a very narrow range that characterized the pair towards the end of 2011. It also provided support back in December 2010 and had a pivotal role. The round number of 1.30 is psychologically important and also worked as some support. After the breakdown, it was shattered and is now weak.

The relatively new low of 1.2945 is still important, and now as clear resistance. 1.2873 is the previous 2011 low set in January, and still provides resistance. This was seen over and over again.

1.2760 is a pivotal line in the middle of a recent range. It provided support early in the year. 1.2660 was a double bottom during January and the move below this line is not confirmed yet.  1.2623 is the current 2012 low, but only has a minor role now.

A more important line is 1.2587, the trough of August 2010. This line will be closely watched on any move downwards. A break below this line will send the pair to levels last seen 18 months ago.

Even lower, 1.2520 is another minor support line, before the round number of 1.24, which was of importance a long time ago.

1.2330 is also an ancient pivotal line, that now works as support. The last important line for now is 1.2144.

Downtrend channel

The pair can be seen as trading in a parallel, yet wide channel. Downtrend resistance is more significant than downtrend support, even thought it dates back only to December. Downtrend support starts in October, but is far from the pair at the moment.

I remain bearish on EUR/USD

The debt crisis has certainly worsened now. The breakup of talks between the banks and Greece paves the road for a Greek default, and it might turn ugly. Also the downgrade of France and Austria has severe consequences on the whole bailout concept, as the EFSF bailout fund will likely see a downgrade.

The ECB managed to buy time with the banks through the LTRO, but will have to step up its efforts: either by taking a hit on its Greek bonds, or by buying more peripheral bonds to help stabilize the system. Either way, this is a lose lose situation for the euro, that is not fully priced in.

If you have interest in a different way of trading currencies, check out the  weekly binary options setups, including EUR/USD, GBP/JPY and more.

Further reading:

• 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 the Swiss Franc, see the  USD/CHF forecast.
• USD/CAD  (loonie), check out the  Canadian dollar.