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The ECB managed to slow the euro‘s fall, by hinting more hikes and aiding Portugal. Will this push the pair higher? Or is it just a pause before the next fall? The upcoming week consists of the stress test results as well as other indicators. Here’s an outlook for the market moving events, and an updated technical analysis for EUR/USD.

Despite the slowdown in Europe and all over the world, Trichet decided to raise the rates once again. This isn’t what Europe needs. It seems like a repeat of the same short-sighted mistakes made exactly three years ago. It seems that with concern to Italy, the markets aren’t awaiting the stress test results, and are pounding the Italian banks. This also weighs on the euro.

EUR/USD chart with support and resistance lines on it. Click to enlarge:EUR/USD Chart  July 11 15 2011

  1. French Industrial Production: Monday, 6:45. Europe’s second largest economy has experienced two consecutive months of dropping production, worse than expected. A correction, with a small rise, is likely now.
  2. Industrial Production: Wednesday, 9:00. This figure is published after Germany and France already published their own figures. Nevertheless, it still tends to surprise and have a significant impact. A small rise is expected.
  3. Stress Test Results: Wednesday. This event will trigger a lot of debate. Not on the results themselves, but on the methods. Last year, the stress tests were pretty good, especially for Ireland. We all remember that this ended with a huge bailout. Around 15 banks are expected to fail the tests. A failure of more banks could be a good sign that the tests were serious, and would trigger action. A small number of failures will make this a non-event.
  4. ECB Monthly Bulletin: Thursday, 8:00. One week after the rate decision, we get to see what ECB officials see. This broad look of the economy usually moves the common currency.
  5. CPI: Thursday, 9:00. The final release of CPI is likely to confirm the annual price rise of 2.7% reported at the Flash release. What’s more interesting is the Core CPI number. Last month it dropped to 1.5%, showing that the impact of oil prices on the basis of prices isn’t too large – no second round effects. The same number is expected now.
  6. Trade Balance: Friday, 9:00. While Germany enjoys a large surplus, the continent as a whole suffers from a deficit. This deficit rose to almost 3 billion euros last month. It is likely to drop to around 2 billion this time.

* All times are GMT.

EUR/USD Technical Analysis

The common currency began the week with a rise, that even temporarily passed the 1.4550 line (mentioned last week). The tables then turned on euro/dollar with significant falls. 1.4375 capped recovery attempts.

Technical levels, from top to bottom:

The top line of resistance is at 1.4550. It is somewhat weaker now, but had a pivotal role a few weeks ago, when the euro was trading higher.

The resistance line of 1.4450, which was an important line in the past, and had different roles beforehand.  1.4375 provided support a few weeks ago, and now capped an attempt to recover. It did it perfectly well, and returns to be of high importance.

The peak of November 2010 at 1.4282 has been a weak, yet clear line of support just now and is still important. 1.4220 was a cushion twice and joins our graph.

1.4160 was a swing high in the past, and also a swing low a few weeks ago, before the big surge to higher levels. It remains pivotal, but is weaker than earlier. Close by,  1.4120 held the pair now, and is a new line of support on the chart.

It is followed by 1.4070, which was a swing low in the previous week.  Just above the round number of 1.40, we find very important support at 1.4030 – this is a very distinctive line, as seen in the graph.

Lower, 1.3950 was a pivotal line when the pair traded in lower ranges and proved that it is of high importance. The fall of the pair stopped short of reaching this line.  Another significant support line is at 1.3860, which worked in both directions earlier this year.

1.3570 worked as support at the beginning of the year, and will have the same role if the Euro falls that far. The last important line is 1.3440, that is very distinctive. It was a clear border between ranges, more than once in recent years. A break below will be a very bearish sign.

Narrowing Channel  

As you can see in the graph, downtrend resistance accompanies the pair since the beginning of June. Uptrend support is with us since the end of May. EUR/USD is closer to support. If the pair continues sliding, it will meet this uptrend support.

I remain bearish on EUR/USD.

Thought it was over with Greece? This week it was Portugal and Italy. Despite the stubborn rate hike and the hawkishness of the European Central Bank, the debt crisis and the global slowdown (as seen in the US Non-Farm Payrolls) make room for more falls for the pair.

Here are additional recommended reads for the pair:

  • Simon Smith criticizes the gamble of the ECB.
  • John Kicklighter states that a selective default for Greece is already accounted for.
  • Kathy Lien examines rate expectations and sees that only the ECB is expected to hike.
  • Sophia Todorova provides a technical outlook using Fibonacci fans.
  • Andriy Moraru provides weekly support and resistance lines for major pairs, including EUR/USD.

Further reading: