EUR/USD Forecast May 27-31

Eur/Usd managed to recover an remain resilient in a week that saw a lot of turbulence. Can the euro remain stable or will the talk about the next moves of the ECB weigh on the euro? German retail sales, inflation  and employment data in Germany and the Eurozone are the main events this week . Here is an outlook on the main market-movers and an updated technical analysis for EUR/USD.

Germany, the largest economy in the euro-zone, produced mixed signals: on one hand, it printed less than satisfactory services PMI, while manufacturing PMI also failed to reach the 50 point line. It seems that Europe’s locomotive is stuck due to its neighbors’ recession. However, the IFO business climate showed better prospects for the future. The euro rocked on Bernanke: at first, the prepared statement showed that the Fed is worried about a premature withdrawal of QE, and EUR/USD tried reaching 1.30. However, when asked about an exit strategy,Bernanke opened the door for QE tapering in one of the “next few meetings” and the pair dropped. The focus could shift back to the ECB, with the talk about a negaitve interest rate, especially if inflation falls again. Let’s Start:

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

1. German Import Prices: Monday. German Import Price Index dropped 0.1% in March, following a 0.3% expansion in February, while economists expected no change. On an annual basis the Import Price Index fell 2.3% in March, down from the 1.6% decline in February and slightly above expectations of -2.4%. Another fall of 0.2% is forecast.
2. German CPI: Wednesday. Consumer prices declined 0.5% in April, following a 0.5% gain in March, dropping the annual inflation rate to 0.9% from 1.4% in March. The reading was worse than the 0.2% fall predicted by analysts. Inflation pressure in Germany is expected to remain moderate in the near future and the government projects only 0.5% GDP growth this year due to the weak global economy. A rise of 0.2% is expected this time.
3. German Unemployment Change: Wednesday, 7:55. German unemployment edged up slightly in April by 4,000 due to cold winter weather keeping people out of work. The reading was worse than the 2,000 addition expected by analysts following a 12,000 increase in March. However, unemployment rate remained low at 6.9%. The same increase of 4,000 is expected now.
4. M3 Money Supply: Wednesday, 8:00. The annual expansion rate of the total currency in circulation in the euro area fell to 2.6% in March, from 3.1% in February. Economists expected a 3.1% increase. The reduction of deposit from banks within the euro area was due to the huge bailout deal reached between the Troika and Cyprus. In March, Cypriot deposits reached €44.2 billion. The annual growth rate of short-term deposits had dipped to 0.5% in March, from 0.8% in the previous month. Another increase of 2.9% is anticipated.
5. Retail PMI: Thursday, 8:10. Eurozone purchasing managers index continued to show weakness in retail sales during April, reaching 44.2 , from 43.7 in March, still below the 50 point line, indicating contraction. Italian retail PMI fell to a four month low of 37.2 and Germany to a two month low at 49.7. Both France and the Eurozone as a whole saw a two month high, of 43.7 and 44.2 respectively.
6. German Retail Sales: Friday, 6:00. German retail sales declined for a second month in March, down 0.3% following 0.6% fall in February, further evidence to the struggle of Europe’s largest economy. The reading was slightly below forecasts of a 0.2% decline. Business confidence also declined for a second month in April due to slower growth. A rise of 0.3% is forecast.
7. French Consumer Spending: Friday, 6:45. French consumer spending edged up more than expected in March, rising 1.2% amid soaring food sales and increased energy consumption. The reading followed a 0.2% fall in the previous month, beating market predictions for a minor rise of 0.2%. The figures suggest that domestic demand supports the economy despite high levels of unemployment. A decline of 0.5% is projected.
8. Italian Monthly Unemployment Rate: Friday, 8:00. Italian unemployment rate remained unchanged in March at 11.5% amid a political standstill and the prolonged economic recession. Economists expected a worse reading of 11.7%. Italian economy is expected to contract by 1.8% this year amid rising unemployment and low consumer and investor confidence. A rise to 11.6% is expected.
9. CPI Flash Estimate: Friday 9:00. Inflation in the euro zone weakened to a three-year low of 1.2% in April, following 1.7% increase in March, amid high unemployment rate diminishing hopes for an interest rate cut by the European Central Bank. Economists expected a higher reading of 1.6%. An increase of 1.4% is forecast this time.
10. Unemployment Rate: Friday, 9:00. Unemployment in the euro currency bloc reached a record high of 12.1%, driven by soaring youth joblessness. Eurozone unemployment rose to 12.1% in March, following 12% in February. The reading indicates that the Eurozone continues to struggle amid major growth headwinds and is still buried in recession. A rise to 125.2% is expected.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week with a gradual climb, settling above the 1.2840 line (mentioned last week). It then continued higher, but couldn’t break 1.30 and collapsed. Another gradual climb saw another attempt on 1.30, but the pair eventually dropped and closed at 1.2934.

Live EUR/USD chart:

Technical lines from top to bottom:

1.3290 served as resistance before the pair collapsed in 2012, After many failures to break higher, the euro finally pushed through. 1.3255 provided support during January 2013 and also beforehand. A recovery attempt failed to reconquer this line.

1.32 is a clear top after capping the pair twice in April 2012 and then in May. This is a round number as well. 1.3160, which separated ranges in May 2013 is a critical line..

1.3100 is a minor line after working as temporary resistance in December 2012. It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, and also working as resistance.

The very round 1.30 line was a tough line of resistance and is becoming stronger after serving as a double top in May 2013. In addition to being a round number, it also served as strong support and recently worked as a pivot line. 1.2960 provided some support at the beginning of the year and also in September and October – the line is now weaker and is just a stepping stone.

Lower, 1.2890 worked in both directions during 2012 and was the beginning of the uptrend support line. It is somewhat weaker now. 1.2840 worked as a cushion for the pair during May 2013 and is a pivotal line at the moment.

Lower, the round number of 1.28 was the bottom of a long term wide range in 2012 and its breach in May 2013 was not confirmed. Below, 1.2750 worked as a separator of ranges during November, and stopped the pair’s drop in March. This is a key line on the downside, as clearly shown in the first week of April. This is followed by the round number of 1.27, which is a minor line.

1.2624 was a swing low in January 2012 and remains important on any break to the downside. It is followed by the veteran line of 1.2587.

I remain bearish on EUR/USD

The attention moved away from the euro-zone to the tapering question in the US and the crash of the Japanese stock market. The focus could now return to the weak GDP numbers, the talk about negative rates and even the call for the ECB to “manage the euro lower“. The thought that Japanese money is going to flood into Europe pushed yields lower. However, fresh data from Japan showed that this is not the case. We could have a rapid return of the debt issues if yields rise. The deep issues in Italy and Spain were never resolved.

In the US, it’s important to remember that figures have improved: better than expected new home sales, a drop in jobless claims and a rise in durable goods orders provide support for tapering QE sooner than later. While the timing remains open, it seems more probable that the next move of the Fed will be to reduce bond buys rather than to increase them.