EUR/USD Outlook – July 18-22

Euro/dollar had another roller coaster week, testing deeper waters. Apart from the ongoing debt crisis, there are quite a few indicators this week. Here is an outlook for these events, and an updated technical analysis for EUR/USD.

After junking Portugal and Ireland, Spain and Italy may face credit rating downgrades as well. A default in Greece also seems more and more likely. If it is done in an orderly fashion, this could help the euro. Only 8 European banks failed the stress tests, and 16 other barely passed. Is this serious? The details will be crunched, and the stock market’s reaction in Europe on Monday could tell the true tale of the tests.

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

1. ZEW Economic Sentiment: Tuesday, 9:00. This is a highly regarded survey, especially the German edition.  The past month has been very disappointing: not only did the score turn negative (meaning economic pessimism), but it fell sharply to -9 points. A rise is likely now, but there is little chance of the figure returning to positive, optimistic ground. The less important all-European number will likely remain around the -5.9 level seen last month,
2. German PPI:  Wednesday, 6:00. After German wholesales prices dropped in a strong manner, also producer prices are likely to fall, after remaining unchanged last month. Inflation indicators point to an easing in pressures.
3. Consumer Confidence: Wednesday, 12:00. This is an official and quite solid figure from Eurostat. Pessimism is quite stable in recent month, with the score floating between -12 and -10. The number is likely to tick down from last month’s -10.
4. Flash PMI: Thursday. Begins in France at 7:00, continues in Germany at 7:30 and ends with the figures for the whole continent at 8:00. Numbers are separated between the manufacturing and services sectors. The numbers that were reported last month have shown a slowdown all over the continent. Some were revised to the downside in the final call. The initial numbers released now are likely to show another slide, but to remain above the critical 50 point level once again. The manufacturing sector is more vulnerable, with the all-European figure standing at 52. A shaky European morning is expected.
5. Current Account: Thursday, 8:00. While Germany enjoys a big surplus, other European many other countries have deficits, and this is reflected in the current account for the whole euro-zone. May’s figures are expected to a similar deficit of 5 billion euros recorded in April.
6. German Ifo Business Climate: Friday, 8:00. Contrary to the depressing ZEW indicator, IFO usually sees the sunny side. This wide survey of 7000 participants is expected to show another rise from last month’s 114.5 points.
7. Industrial New Orders: Friday, 9:00. New orders for manufacturers have recovered last month after a big drop beforehand. No significant change is expected now.

* All times are GMT.

EUR/USD Technical Analysis

The Euro took a dive to a 4 month low at the wake of the new week, hitting 1.3838, a new line that didn’t appear last week. It managed to recover quickly, but remained constrained by the 1.4282 line, and all in all, traded in a lower range this week.

Technical levels, from top to bottom

The top line of resistance that we start with is 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 was a perfectly stubborn cap last week. It hasn’t been challenged since then.

The peak of November 2010 at 1.4282 returns to having a very strong role. It was a very precise line of resistance just now . 1.42 managed to cap recent rises, and is also a round number.

1.4160 is now a pivotal line, where the euro traded around recently. Moving lower, the round number of 1.41 provides weak support.

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. Once again, it provided support after the comeback.

Lower, 1.3950 was a pivotal line when the pair traded in lower ranges and proved that it is of high importance. After the comeback, this line was another clear support line.  The fresh bottom of 1.3838 will be closely watched in another fall. This was also a line of support last 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.

Downtrend channel

The narrowing channel discussed last week was broken to the downside, and belongs to the past. On a wider scope, we have a wide downtrend channel which began back in April. The pair is right in the middle of this channel.

I remain bearish on EUR/USD.

The European debt crisis is very far from a real, comprehensive resolution, despite some interesting and unpopular proposals thrown in the air. The stress tests, published after European stock exchanges closed on Friday, are digested over the weekend, and could weigh on Monday’s markets, weighing on the euro as well.

What Europe needs is growth, and this process can start with an immediate rate cut.

Here are more recommended reads about the euro:

• FX Tech Strategy sees more weakness in EUR/USD (technical analysis)
• Micheal Derks analyzes the US debt ceiling talks, and their impact for the dollar.
• Kathy Lien shows us that the next rate hike in Europe is now expected only in 2012, according to market rates.
• James Chen analyzes the triangle breakdown in EUR/USD.
• Andriy Moraru  provides weekly support and resistance lines for major pairs, including EUR/USD.

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 Zealanddollar (kiwi), read the  NZD forecast.
• For USD/CAD (loonie), check out the  Canadian dollar
• For the Swiss Franc, see the  USD/CHF forecast.