EUR/USD Forecast October 21-25

EUR/USD rallied to a new 8 month high, enjoying the poor resolution to the US political crisis. Can the pair break higher? Or is it consolidation time? German Producer prices, German Ifo Business Climate and Manufacturing and services PMIs are the highlights of this week.  Here is an outlook for these events among others, and an updated technical analysis for EUR/USD, now just under the year-to-date peak.

The Euro strengthened against the US dollar in light of the lingering shutdown, badly affecting US economy. The aversion of the debt ceiling was achieved only at the last moment, and it set new dates for a potential shutdown and default, in early 2014. On this background, the Fed will likely postpone QE tapering and maintain the heavy weight on the dollar. In the meantime ZEW Economic Sentiment continued rising  However, the door to new easing is still open, as ECB officials remain worried about tighter credit conditions and falling inflation, as seen again just now. Let’s start:

Updates:

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

1. German PPI: Monday, 6:00. German producer prices continued to drop in August, down 0.1%, following the same drop in the previous month. The fall occurred amid lower energy prices, despite of sharp increases in consumer goods. Economists expected PPI to rise by 0.1%. a rise of  0.1% is forecasted.
2. German Bundesbank Monthly Report: Monday, 10:00. On the last report issued by the Deutsche Bundesbank in September, it was stated that Germany’s economy is expected to expand in the coming months despite a slow start in the third quarter. The private sector strengthened at its fastest rate since January, although manufacturing declined by 1.7% in July from the previous month. Nevertheless German economy is on a growth trend.
3. Belgium NBB Business Climate: Wednesday, 13:00. Belgian business sentiment soared to its highest point since July 2011, reaching minus 6.7, following minus 8.6 in August. The most significant rise occurred in the service sector, boosted by fresh optimism on business outlook and anticipation for a rise in demand. Economists believe this is a step in the right direction for Belgium. Another improvement to -4.1 is anticipated this time.
4.  Consumer Confidence: Wednesday, 14:00. Consumer confidence in the 17 euro countries rose to -14.9 points in September from -15.6 points in August, though a bit lower than the -14 predicted by analysts. The reading was the best since August 201. The Eurozone pulled out of recession in the second quarter but recovery remains fragile. A better figure of -14 is forecasted.
5. Manufacturing and Services PMIs: Thursday. Activity in the euro zone’s service sector surged in September to the highest level since June 2011, reaching 52.1 following 50.7 in August, indicating an ongoing steady recovery. Manufacturing activity in the euro zone increased at a slightly slower pace than in August, reaching 51.1 down from 51.4 in the previous month. The continued recovery is led by Germany and France. German manufacturing activity grew at a slower pace than in August, reaching 51.3, while the service sector improved to 54.4. French manufacturing activity declined in September to a 4-month low of 47.8, compared to 48.5 in August despite signs of recovery, while the private sector expanded to 50.7 from 48.9. French Manufacturing sector is expected to rebound to 50.3, while the Service sector is predicted to improve to 51.2, German Manufacturing sector is expected to reach 51.6, and the service sector is predicted to reach 53.8, The Euro-area Manufacturing sector is expected to advance to 51.4, while the service sector is expected to improve further to 52.3.
6. Spanish Unemployment Rate: Thursday, 7:00. Spain’s unemployment rate unexpectedly declined for the first time in two years in the second quarter, reaching 26.3% following 27.2% in the first quarter. This fall gives further backing to the government’s announcement that the worst of the country’s economic slump may be over. Unemployment dropped mainly due to seasonal factors, bur the drop was better than expected. Another drop to 26.1% is expected.
7. German Ifo Business Climate: Friday, 8:00. German business confidence improved less-than-expected in September, reaching 107.7 from 107.6 in August, but still increased to the highest level since March 2012. Economists expected a higher reading of 108.4.The Current conditions Index fell to 111.4 in September from 112.0 in August, below the 112.5 predicted by analysts. Business Expectations, for the next six months, improved to 104.2 this month from 103.3 in August, above forecasts for a reading of 104.0. German business confidence is expected to further improve reaching 108.2.
8. M3 Money Supply: Friday, 8:00. The amount of domestic currency in circulation in the euro zone increased unexpectedly in August, rising 2.3% from 2.2% in the previous month. Analysts expected Euro Zone M3 Money Supply to remain unchanged at 2.2% last month. Anither gain of 2.3% is anticipated this time.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week struggling with the 1.3570 line (mentioned last week). It then dived and found support above 1.3460 once again. The dip under uptrend support was temporary and false, and the pair jumped to high ground, stopping only below the year-to-date high of 1.3711.

Technical lines from top to bottom:

We start from higher ground this time: 1.4036 was a separator back in 2011, and awaits the pair if it breaks above 1.40. 1.3940 was a peak in September 2011, over two years ago, and is just before the round number of 1.40.

1.3870 capped the pair during the fall of 2011 and served as the “shoulders” in a H&S pattern. 1.38 is a round number and also worked as a temporary cap during that period of time.

1.3710 was the 2013 peak, and is getting closer. EUR/USD stopped just under this line in October 2013. The line is the next big target.1.3650 temporarily capped the pair during that period of time and is stronger after capping the pair in October 2013. It now works as support.

1.3570 is the swing high of September 2013 and also proved itself as resistance afterwards. 1.35 is a nice round number and was a pivotal line or “magnet” within the previous range.

1.3460 worked as support in late September and should be watched for any downside moves. 1.3415 was the peak back in June and works as another line of support.

1.3325 worked as a double top in early September and it was crossed only with a Sunday gap. It remains a clear separator of ranges. It is followed by 1.3240, which capped the pair in April and also had a role in August. It worked as support in September.

1.3175 capped the pair during July 2013. 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 and providing support in September.

EUR/USD holding well above broken uptrend resistance

The line accompanying the pair since early June was broken by the big surprise and the pair managed to stay on top of it. The line was tested repeatedly, including just before the big jump.

I am neutral on EUR/USD

The US dollar returned to the ugly contest, big time. The solution just sows the seed to the next crisis. In addition to the debt ceiling and government shutdown, another round of sequester cuts awaits us in early January. It is hard to see US politicians reach a deal before the holiday season, and even harder to see the Fed tapering in this environment.

The euro enjoyed the weak resolution from the US, but hasn’t broken critical resistance, and has no reason to continue rallying. The high exchange rate, falling inflation and tight credit have already pushed ECB rhetoric to higher ground. We could see action sooner than later, or at least worries about the strength of the euro. Europe is far from getting out of the woods.