EUR/USD Forecast July 15-19

EUR/USD had a roller coaster week, trading in a range of around 450 pips. Will the action continue? What is the next direction of the pair? German ZEW Economic Sentiment and inflation data are the major events this week. Here is an outlook on the main market-movers ahead and an updated technical analysis for EUR/USD.

Last week, the euro continued to drop against the dollar, and lost long term uptrend support, falling to its lowest level since early April, following the European Central Bank (ECB) officials hint that interest rates will remain low for a period of over 12 months. In the meantime, the Eurogroup released some bailout aid to Greece deciding to give only a portion of the scheduled 8.1 billion, due to the Greek’s failure to meet bailout terms. The euro did enjoy developments on the other side of the Atlantic: the FOMC meeting minutes and Bernanke’s dovish comments sent the dollar tumbling down hundreds of pips and EUR/USD challenged 1.32 before consolidating on lower ground. Many questions remain. Let’s start.

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

1. Italian Trade Balance: Tuesday, 8:00. Italy registered a trade surplus of 1.907 billion euros in April, following 3.24 billion euros surplus in the previous month. Despite the drop in surplus the reading is far better than the 250 million euros deficit reported a year ago. In the first four months of the year Italy posted a global trade surplus of 4.626 billion euros, a major improvement from last year. A 2.14 billion surplus is expected now.
2. German ZEW Economic Sentiment: Tuesday, 9:00. German analyst sentiment edged up for a second straight month in June, reaching 38.5 from 36.4 in May, indicating a moderate recovery in the German market. Economists expected a lower figure of 38.2. Germany’s economy escaped recession, making numerous rebounds. The pace of recovery is picking up and the private sector shows a modest expansion. Another rise to 39.9 is forecast this time.
3. Inflation data: Tuesday, 9:00. Inflation in the euro zone increased from a three-year low of 1.2% in April to 1.4% in May, but remained low enough for the European Central Bank to act to boost. The central bank projects economic recovery in the Eurozone will gather pace later this year, but sees downside risks in continued austerity measures enacted by EU governments, making it difficult for companies to access credit from banks. European Union leaders promised to fight rising unemployment, especially among the young, and focus on how to encourage growth amid the tighter economic conditions. CPI is expected to gain 1.6%, while core CPI is anticipated to climb 1.2%.
4. ZEW Economic Sentiment: Tuesday, 9:00. The euro area ZEW economic sentiment edged up to 30.6 in June amid increase optimism regarding the next six-month economic outlook. Economists predicted a lower reading of 29.4. This release was preceded by a 27.6 reading in May. A further rise to 31.8 is predicted.
5. Current Account; Thursday, 8:00. The euro zone’s current account surplus narrowed in May to 19.5 billion euros from an all-time high of 25.7 billion in April. Despite the decline in surplus, the reading remained positive, beating market predictions for a lower surplus of 15.1 billion euros. The elevated figures suggest the EU exports outweigh imports, an encouraging sign of recovery. Current Account is expected to reach 21.3 billion this time.
6. German PPI: Friday, 6:00. Producer prices dropped for the fourth consecutive month in May, down 0.3%, following a 0.2% fall in April. A steep decline in the energy sector was the leading factor for this fall, impacting overall prices. The six-month low in producer prices suggests subdued inflationary pressures. Another fall of 0.2% is expected now.
7. G20 Meetings: Fri-Sat. G20 meetings are attended by finance ministers and central bankers from 20 industrialized nations including the G7 nations. The meeting will take place in Russia on July 19-20. The main issues on the table are the U.S. Federal Reserve’s exit strategy on stimulus and its effects of financial markets such as South Korea and other Asian markets and the continuation of discussions on Japan’s aggressive money-printing campaign.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar kicked off the week trading between the 1.28 and 1.2840 levels (mentioned last week). It then made a first move higher, but eventually tumbled down to levels last seen in April. After testing the 1.2750 level, it totally changed its direction and shot up all the way to 1.32, before settling in a lower range, above 1.30.

Technical lines from top to bottom:

The round line of 1.34 served in both directions when the pair traded in higher ground. The pair temporarily breached this line in June.  1.3350 provided support when the pair traded higher in February and now serves as a pivotal line.

1.3255 provided support during January 2013 and also beforehand. A recovery attempt failed to reconquer this line at first, but now this line is strong support. 1.32 is a clear top after capping the pair twice in April 2012 and then in May as well as stopping the big Bernanke surge in July. This is a round number as well.

1.3160, which separated ranges in May 2013 is strengthening once again and worked perfectly well as a cap to a recovery attempt in June and later a second attempt to rise in July.1.3100 is worked as temporary resistance in December 2012 and is becoming more important once again, after capping a recovery attempt in June and then in July.

It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, but it is less significant now. The very round 1.30 line was a tough line of resistance. In addition to being a round number, it also served as strong support and recently worked as a pivot line.

1.2940 is the next line of support. It worked as such during April and May 2013. Lower, 1.2890 worked in both directions during 2012 and was the beginning of the uptrend support line. It is becoming more important, as a clear separator of ranges.

1.2840 worked as a cushion for the pair during May 2013. 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 and then in July. This is followed by the round number of 1.27, which is a minor line.

1.2660 follows closely. This was the low in November 2012 and where the second uptrend support begins. The last line for now is 1.26, which capped the pair back in early September.

False break of long term uptrend support

EUR/USD made a significant dive below downtrend support, but this lasted only a few hours. From there (and from 1.2750) the pair shot higher. This line is still worth noting.

I remain bearish on EUR/USD

It is hard to remain a dollar bull after Bernanke’s dovish comments, but let’s take another look: did he say anything new? No. The unemployment rate overstates the real situation in labor markets – this is not the first time he said these words. And what is accommodative policy? Not only infinite QE but also very low interest rates and some QE. Actually, Bernanke didn’t say anything about tapering. The last time he said something about tapering was in the press conference, and there he mentioned potential dates.

Regarding the euro, the ECB still maintains a clear downside bias, and has made it clear that even lower rates are considered. Also the specific issues didn’t go away: Germany is not really growing fast, the Portuguese crisis isn’t resolved and Spain’s government could collapse.