EUR/USD rode on the dollar weakness and reached higher ground. Can this strength continue? German Consumer Sentiment, inflation and employment data all precede the all-important rate decision and the accompanying “Draghi show”. Here is an outlook on the main market movers and an updated technical analysis for EUR/USD, now on higher ground.
Last week
PMI releases in the Eurozone continued on a positive note, German Ifo Business Climate advanced further, in line with market expectations, climbing to 106.2. Spain’s unemployment rate posted an unexpected decline down to 26.3%. All these encouraging releases raise hope for a pick-up in economic activity in the euro-zone. How will Draghi see it? In the US,
data remained quite mixed: not good enough to prevent the greenback from falling.
EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- GfK German Consumer Climate:Tuesday, 6:00. German consumer confidence continued to improve in June, rising to 6.8 from 6.5 in May. The reading was higher than the 6.6 points forecasted by analysts. Economic expectations improved to 1.1, while income expectations continued their advance, climbing 2.3 points to 36.2. A further rise to 6.9 is expected now.
- German Prelim CPI: Tuesday. The consumer price index in Europe’s leading economy, climbed 0.1% in June, better than forecasted, following a 0.4% gain in the previous month. Overall price changes are moderate. The Bundesbank expects German inflation to reach 1.6% this year and 1.5% in 2014. A gain of 0.3% is anticipated now.
- Spanish Flash GDP: Tuesday, 7:00. Spanish economy continued to shrink in the first quarter down 0.5%, amid worsening in the housing sector and consumer spending indicating Spain remains in recession this year. Imports fell sharply, but exports increased 38.6% last year and are expected to grow further this year. The government says the worst is over and recovery is expected at the end of 2013. a drop of 0.1% is forecasted.
- Retail PMI: Tuesday, 8:10. The pace of decline in retail sales in the 17-member eurozone slowed considerably in June reaching 49.1 after posting 46.8 in May. This figure is nearing the 50 point line separating between contraction and expansion.
- German Retail Sales: Wednesday, 6:00. German retail sales rebounded in May with a 0.8% gain, following a 0.1% decline in the previous month. Economists forecasted a 0.4% increase. The strong labor market and positive consumer confidence boosted sales. On a yearly base German retail sales were up 0.4%. a rise of 0.1% is predicted now.
- French Consumer Spending: Wednesday, 6:45. French consumers increased their spending in May, advancing 0.5% despite concerns about surging unemployment. The rise beat forecasts for an unchanged reading and was preceded by a 0.5% fall in the previous month. The improvement in French consumer spending was in correlation with a rise in German retail sales in May. An advance of 0.1% is forecasted.
- German Unemployment Change: Wednesday, 7:55. Domestic labor market in the Eurozones largest economy expanded due to the spring pick-up. Unemployment dropped 12,000 in June to 2.943 million, after a 21,000 increase in the previous month, moving further away from the psychologically important three-million threshold. German unemployment was relatively low compared to its EU allies such as Spain and Greece. A further drop of 1,000 is expected this time.
- Italian Monthly Unemployment Rate: Wednesday, 8:00. Italian unemployment rate hit a record high in May, increasing to 12.2% from 12.0 in April. Economists expected a more modest rise to 12.1%. Among young people aged 15-24 unemployment rate fell to 38.5% in April was revised down to 39.9% .Italian government announced a 250 billion euros plan to promote youth employment. Another increase to 12.3% is expected now.
- CPI Flash Estimate: Wednesday, 9:00. Consumer price inflation in the 17 members of the Eurozone increased to 1.6% in June from 1.4% in May, This was the second consecutive rise in the recession stricken area. Food prices rose 3.3% and prices of energy gained. The same increase of 1.6% is expected this time.
- Unemployment Rate: Wednesday, 9:00. The unemployment rate across the eurozone edged up once more in May to a record of 12.1 from 12.0 in April, amid ongoing recession badly affecting workers around the region especially youth. The youth unemployment rate was almost double reaching 23.8. In Spain and Greece the youth unemployment rate was as high as one in two. Economists expected an even higher unemployment rate of 12.3% warning of further worsening before the expected recovery. Another record of 12.2% is expected now.
- Manufacturing PMIs: Thursday. Manufacturing PMI in Spain Italy and the Eurozone were better-than-expected boosting sentiment in Europe. Manufacturing Purchasing Managers’ Index in Italy rose from 47.3 in May to a 23-month high of 49.1 in June and PMI in Spain surprised posting 50.0 in June, from 48.1 in June, despite the ongoing recession in the country. Finally the Eurozone Manufacturing PMI also showed a modest improvement wising to 48.8 in June from 48.7 in May. Spain is expected to reach 50.7, Italy is predicted to decline to 49.8, and the Eurozone is expected to rise to 50.1.
- Rate decision: Thursday, 11:45, press conference at 12:30. The ECB made a big change in its approach by introducing forwards guidance in July and it also loosened collateral rules. Therefore, we might see the ECB take a break from policy announcements. And, as Draghi tends to move from pessimism to optimism in every meeting, we can now expect an upbeat atmosphere that could help the euro. Draghi is expected to re-iterate the readiness of both the OMT (as yields are higher) and of a negative deposit rate. However, we could see the euro pressured if Draghi signals that there is pressure for a rate cut within the ECB, especially if it is a cut of the deposit rate. There were reports that Draghi wanted a cut last time, but encountered opposition
- Spanish Unemployment Change: Friday, 7:00. The Spanish government remarked a sharp improvement in unemployment over the past four weeks. The main reason was a strong tourist season. Spanish job seekers dropped by127,248 people in June to 4.76 million unemployed. Spain has been suffering from record-high unemployment due to ongoing recession, dealing with the housing sector crash in 2008. But recent figures suggest a remarkable improvement. Government officials in Madrid claimed its austerity measures and labor reforms are finally starting to work. Another decline of 80,000 is anticipated.
*All times are GMT
EUR/USD Technical Analysis
Euro/dollar started the week by moving above the 1.3175 line (mentioned
last week). This line eventually served as support. It then traded in a clear range between 1.3175 to 1.3255 before making a break higher.
Technical lines from top to bottom:
We start from higher ground this time. 1.3520 was a swing high in February, before the pair tumbled down. 1.3480 was part of a head and shoulders pattern seen in January and February.
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 is the next line if the pair breaks above 1.33.
1.33 capped the pair quite strongly during July 2013. 1.3255 provided support during January 2013 and also beforehand. A recovery attempt failed to reconquer this line at first, but after the break, the line is now strong support.
1.3175 capped the pair during July 2013 and works as another line of defense for any moves to the downside. It proved its strength 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.
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.
False break of long term uptrend support
Uptrend channel
As the lines show, EURUSD is trading in an uptrend, narrowing channel since mid July. Uptrend resistance is steeper than uptrend support. A break higher would be good news for the bulls. A break to the downside would need to be convincing, after the false break that occurred recently (described above)
I am neutral on EUR/USD
There are some signs of improvement in the old continent which are hard to ignore:
German PMIs are positive and euro-zone PMIs have advanced. In Spain, unemployment took a dive for a change (to 26.3%) and the
political crisis isn’t taking over. Also in France, there are some signs of optimism. Greece was given its tranche of aid without drama. Italy remains in trouble. So, the picture isn’t bright, but the situation isn’t as bad as it was. Draghi could push the euro lower, but given his mood swings, the upcoming press conference might be positive after
a negative one last time.
In the US,
economic signs remain mixed. Tapering isn’t fully priced in, so positive US data (especially the NFP) could certainly boost the dollar. We will probably see a lot of action in the upcoming week, but the pair could end the week close to where it starts it.
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