EUR/USD Forecast December 16-20

EUR/USD continued rising, but was unable to reach the previous highs. Is it about to change direction? Manufacturing and services PMIs, President Draghi’s speech, German ZEW Economic Sentiment and the Ifo Business Climate indicators. Here is an outlook for the market moving events and an updated technical analysis for EUR/USD.

Most recent indicators from the old continent haven’t been encouraging: industrial production unexpectedly fell in Germany, France, and in all the euro-zone. Inflation numbers from both core countries have been weak. In the US, politicians reached a budget deal that averts another government shutdown. Together with a positive employment figure that the Fed watches, chances for QE tapering seem even higher in December. With a lower high in place, can the pair reverse the gains? Let’s start:

Updates:

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

1. Manufacturing and Services PMIs: Monday. Recovery in the euro zone private sector weakened unexpectedly in November despite robust growth in Germany, due to a sharp fall in French business activity. Markit’s Eurozone Services Purchasing Managers’ Index, fell to 50.9 in November from 51.6 in the previous month, missing analysts’ predictions of a 51.9 reading. Meanwhile the manufacturing sector edged up marginally to 51.5 from 51.3 in the previous month. The lukewarm figures exemplify the fragile nature of the Eurozone’s recovery. French business activity shrank from 50.9 to 48.8 and the Manufacturing service further contracted to 47.8 from 49.1in October. German economy is the only force keeping the Eurozone from recession demonstrating robust growth with the manufacturing sector climbing to 52.5 from 51.7 and the services sector reaching 54.5 following 52.9 in the previous month. Nevertheless, output outside France and Germany increased for the fourth consecutive month, indicating the euro-area is on a growth trend; however the scale of improvement raises concerns. French manufacturing sector is expected to reach 49.1 while the services sector is predicted to climb to 48.9. German Manufacturing is expected to expand to 53.1 and the service sector is expected to reach 55.2. The Eurozone Manufacturing is expected to climb to 51.9 and the services sector is expected to reach 51.5.
2. Trade Balance: Monday, 10:00. The euro zone’s trade surplus increased in line with market forecast, reaching 14.3 billion euros in September from 12.3 billion in the previous month. Imports remained flat and exports increased. Total surplus of the euro zone for the first nine months of the year more than doubled on the year to 109.6 billion euros, compared with 50.2 billion euro surplus in the same period of 2012. The Eurozone failed to continue its growth trend from the second quarter mainly due to France’ contraction. The southern Euro countries, are weakened by record high  unemployment, weak growth and harsh austerity measures. Therefore are not fair match to other neighbor economies with stronger footing.  Trade surplus is expected to widen further to 15.2 billion.
3. German Buba Monthly Report: Monday, 11:00. Deutsche Bundesbank November report revealed a positive projections for Germany. The bank members believe current momentum will continue and will gain a stronger foothold in the coming months. Germany’s gross domestic product increased 0.3% in the third quarter from the preceding quarter, driven exclusively by domestic demand, a trend that is likely to continue. However the central bank warned, that creating an investment-friendly climate in Germany depends on the incoming government after elections earlier this year.
4. Mario Draghi speaks: Monday, 14:00. ECB President Mario Draghi will speak at the European Parliament’s Committee on Economic and Monetary Affairs, in Brussels. Draghi may talk about his call on national governments to deliver economic reforms focusing on completing the banking union, implementing growth-friendly fiscal consolidation, and structural reforms in labor and product markets. His last appearance was calm, and it boosted the euro.
5. German ZEW Economic Sentiment: Tuesday, 10:00. German investor sentiment gained traction in November reaching 54.6, its highest level since October 2009, with a firm improvement in the Eurozone outlook.  However ZEW’s current conditions index fell marginally for the second consecutive month, down to 28.7 from a reading of 29.7 in the previous month. The gain in investor projections goes hand in hand with German stable growth. GDP increased 0.3% in the third quarter and the Bundesbank expected further growth in the final quarter as well.  Another improvement to 55.5 is expected this time.
6. Inflation data: Tuesday, 10:00.  According to the initial read for November, inflation moved up from the lows, reaching 0.9%. The ECB cut its main interest rate by 0.25% because of this low inflation rate of 0.7% in October. A 1.5% yearly rate is expected to continue during next year, before easing slightly to 1.4% in 2015. CPI is expected to climb 0.9% while core CPI is predicted to gain 1.0%.
7. German Ifo Business Climate: Wednesday, 9:00. German IFO Business sentiment, based on around 7,000 monthly survey responses, edged up to 109.3 points for November, beating forecasts of 107.9 and topping October’s reading of 107.4. German economic growth softened in the third quarter, posting a mild rise of 0.3% compared to 0.7% growth rate in the previous quarter. The main force leading the expansion was a rise in domestic demand. The Bundesbank optimistic projections for Germany’s future growth forecast further support this rise.  Another improvement to 109.7 is forecasted.
8. Current Account: Thursday, 9:00. The euro zone’s current account surplus shrank unexpectedly in September, reaching a seasonally adjusted surplus of EUR13.7 billion compared to an upwardly revised reading of EUR17.9 billion in August. Economists expected the euro-area current account surplus to widen to EUR18.3 billion in September. On a 12 month cumulated reading for the period ending in September 2013, surplus reached EUR196.5 billion, 2.1% of euro area GDP, compared with a surplus of EUR100 billion, 1.1% of euro area GDP, for the previous 12-month period. Current account surplus is expected to reach 14.2 billion this time.
9. German PPI: Friday, 7:00. On a monthly basis the German PPI edged down 0.2% in October, following  0.3% growth in September. Economists expected a small rise of 0.1%. On a yearly basis PPI declined 0.7% in October, after dropping 0.5% in September, slightly below expectations of -0.6%. No change is expected now.
10. GfK German Consumer Climate: Friday, 7:00. German consumer sentiment climbed to a six-year high of 7.4 points in December, following a 7.1 reading in the previous month. The increase shows that domestic demand is now the main force behind Germany’s economic growth, compensating for weaker exports this year. A small gain to 7.5 is anticipated.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week climbing from 1.3675 and going all the way to the 1.38 line (mentioned last week). After two failed attempts to cross this line, it fell and lost some ground.

Technical lines from top to bottom:

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.

1.3832 is the 2013 peak so far. The failure of the pair to get close to this line for a second time might make it a top for a long time. 1.38 is a round number and also worked as a temporary cap during that period of time and also in October 2013.

1.3710 was the previous 2013 peak, and served as a clear separator. The pair needed a big trigger to break above this line, and when it lost it again, the fall was painful. 1.3675 capped the pair in December and also provided some support back in October.

1.3615 worked as resistance in December, as an upper bound for the range. It is followed by 1.3525, which was the lower bound during this period and also had the opposite role in early 2013.

1.3440 worked as a clear separator in early November 2013 and is a key line to the upside. The round number of 1.34 worked as resistance several times in 2013, and is strengthening now.

1.3320 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.

Uptrend resistance, Lower high

From early November, the pair is trending higher, riding above an uptrend support line that currently provides support around 1.36. The downtrend black thick line emphasizes the lower high the pair reached: from 1.3830 in October to 1.38 in December.

I turn from neutral to bearish on EUR/USD

No news proved to be good news for the euro once again, but with a lower high on the charts, the worries about a strong euro and a sluggish economy,  we could see weakness in the pair.

And more importantly during this week, a decision on QE tapering could boost the dollar. This is supported by positive job numbers, no political hurdles and a separation of expectations between QE tapering and a rate hike. All culminate to a perfect setting for the move that could make the USD the big winner now and in 2014.