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Euro/dollar  made another move lower, on the spread of the bond rout to the core of the core: Germany. Apart from the worsening debt crisis, the upcoming week features 10 indicators. Here is an outlook for the events and an updated technical analysis for EUR/USD.

Germany failed to cover a routine bond auction, and its yields began rising as well. Will the ECB embark on QE now?  Spanish yields remain under control despite another problematic auction while Portugal got a rating downgrade. Greece still awaits aid. Apart from the debt crisis, PMIs provided more evidence of a recession, but at least the IFO survey was positive, but all in all, there are many reasons for continued drops.

Updates: Talk about an IMF plan for Italy, eurobonds and other ideas reversed the recent losses of the euro, even though these plans don’t look real. The correction sent EUR/USD to 1.34 after a Sunday gap, but the situation remains fragile. After the hopes about a huge IMF package disappeared, Italy received positive news from a good bond auction for a change. This helps keep EUR/USD around 1.34, after falling. The euro certainly enjoyed the decision to cut US dollar swap rates by 50bp. This provides relief to European banks. It sent the pair back to the 1.3420 – 1.3550 range. As this decision doesn’t solve the core problem, this rally will likely be short lived. Towards the Non-Farm Payrolls, EUR/USD is trading higher in range, as hope for a good figure are seen. Update: US Non-Farm Payrolls came out as expected: 120K. This was lower than the rumor and sent the euro lower. On the other hand, the unemployment rate surprised with a drop to 8.6%.

EUR/USD daily graph with support and resistance lines on it. Click to enlarge:EUR/USD Chart November 28 December 2 2011

  1. German Retail Sales: Publication time unknown at the moment. Europe’s No. 1 economy saw a disappointing, weak rise of 0.3% in the volume of sales in October, after a plunge of 2.9% in September. A small rise is likely now. Another fall would be very worrying.
  2. German  GfK Consumer Climate: Monday, 7:00. This 2000 strong survey surprised with a rise from 5.2 to 5.3 points in October. The figure for November will likely be worse, although Germans still don’t feel the economic downturn.
  3. German CPI:Monday. Prices in Germany have remained very stable in the past three months, hardly moving at all. No change was recorded in October, and November will likely be the same. Note that the various German states publish the figures throughout the day.
  4. M3 Money Supply: Monday, 9:00. The amount of money in circulation has risen to pace of 3.1% in October. For the ECB, this is a sign that inflation is still a risk. A drop under 3% is likely now, as the European economies soften.
  5. French Consumer Spending: Wednesday, 7:45. The euro-zone’s second largest economy has been disappointing in the past three months. Last month saw a drop of 0.5%. A small rise this time probably won’t compensate for the drop.
  6. German Unemployment Change: Wednesday, 8:55. After 9 months of impressing drops in the number of unemployed people, Europe’s locomotive disappointed with a gain of 10K. A drop is expected this time. Another rise will add fuel to the fire.
  7. CPI Flash Estimate: Wednesday, 10:00. While the economies turn lower, inflation still remains elevated. The annual pace of headline inflation is at 3%. A small drop is expected now, but it will likely remain above the 2% target of the ECB.
  8. Unemployment Rate: Wednesday, 10:00. The high unemployment rate continues weighing on Europe. The average rose to 10.2%, but there’s a big gap between the different countries: Germany’s unemployment rate is at around 7%, while Spain has a rate of 21.5%. No change is expected now.
  9. Final Manufacturing PMI: Thursday, 9:00. According to purchasing managers, the manufacturing sector is contracting in the past 4 months. The initial figure for November stands 46.4 points, continuing the decline within negative territory (under 50). This will likely be confirmed now.
  10. PPI: Friday, 10:00.  Producer prices rose by 0.3% last month, more than compensating the drop of 0.2% seen beforehand. A small rise is expected now. All in all, PPI is relatively stable.

* All times are GMT.

EUR/USD Technical Analysis

During the first part of the week, the euro traded between the 1.3420 and 1.3550 lines mentioned last week. It then broke down, heading for levels last seen in October. The pair eventually closed very low: at 1.3234

Technical lines from top to bottom:

We start from a much lower point this week. A strong line is 1.3650, which worked quite well in recent weeks, and was only temporarily breached. It is one of the more distinct lines in the range. Next we have a tough line: 1.3550 provided support early in September and then switched to resistance after the fall. It proved it can work as good resistance as well.

1.3480 is more minor now after being a pivotal line in the range. It also had a role in September. The 1.3420 line held quite well, and when this bottom border of the range was broken, it  immediately  switched to resistance – a distinct line separating ranges.

The level of 1.3380 is the next line. It is a minor pivotal line now. 1.3320 is a support line, that held the initial drop of the euro. More important support is at 1.3212 which held the pair just now.

Very important support is at 1.3145 which is the lowest point seen in the current round of the crisis. It is closely followed by 1.3080, which provided some support when the pair was range trading at the end of 2010.

The round number of 1.30 is psychologically important, before the low of 1.2873 seen early in the year. This year to date low is of high importance.

Below this line, it’s back to 2010. 1.2737 worked as support several times in the past. 1.2587 was the trough seen in the autumn of 2010 and is a key line.

Downtrend channel

A sharp and narrowing downtrend channel can be seen on the graph. Downtrend resistance begins at the end of October and is formed with two attempts to rise. Downtrend support was formed later on but is more distinct – it wasn’t violated, like last week’s downtrend resistance.

I remain bearish on EUR/USD

The scenario of “the broken benchmark” – problems with German bonds, happened sooner than expected. If the ECB doesn’t intervene, the situation is likely to deteriorate. When it does, a short term rally could be followed by the fate of other countries that embarked on QE: their currencies devalued.

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.

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