EUR/USD Forecast October 14-18

EUR/USD traded in range on the US uncertainty and eventually closed the week marginally lower. Will it pick a new direction now? German ZEW Economic Sentiment, industrial and inflation data are the main market movers. Here is an outlook for the market moving events, and an updated technical analysis for EUR/USD that holds above uptrend support so far.

EUR/USD was supported by the US government shutdown and the upcoming debt ceiling deadline, as well as the poor jobless claims reading. Germany posted an unexpectedly strong trade surplus of 15.6 billion in September but Factory Orders dropped by 0.3% while expected to gain 1.2%. Germany is the leading economy in the Eurozone, having a strong impact on market sentiment. Will German economy growth pick-up in the coming week? Let’s start:

Updates:

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

1. German Import Prices: Monday. German Import Prices expanded 0.3% on a monthly basis during July, in line with market expectations following a 0.8% decline in the previous month.No change is expected now.
2. Industrial Production: Monday, 9:00. Euro-area industrial output declined unexpectedly by 1.5% during July, following a 0.6% gain in the prior month. The fall was worse than the 0.1% decline predicted by economists. The reading indicated recovery is expected to be mild in the third quarter, despite small gains in the Euro members.A rise of 0.8% is anticipated this time.
3. Eurogroup Meetings: Monday, 9:00. Eurogroup meetings held in Brussels will be attended by the Eurogroup President, Finance Ministers from Eurozone member states, the Commissioner for economic and monetary affairs, and the President of the European Central Bank. They discuss financial issues, related to the Eurozone and develop support mechanisms. Officials usually release information to press which can cause volatility in the markets.
4. French CPI: Tuesday, 6:45. Consumer prices increased 0.5% in August, in line with expectations following a 0.35 fall in July, lowering annual inflation to 0.9%.  Food prices fell 0.4%, health products declined 0.1% and health services 0.7%. The main gains occurred in clothing and shoes. Inflation is expected to drop 0.3% now.
5. German ZEW Economic Sentiment: Tuesday, 9:00. German monthly survey of economic sentiment soared to 49.6 in September from 42.0 in August, reaching the highest level since April 2010 and beating market consensus for a rise to 45.3. This rise is a clear sign that German economy is strengthening. German domestic demand and exports improved significantly. A small drop to 49.2 is projected.
6. ZEW Economic Sentiment: Tuesday, 9:00. The ZEW economic sentiment for the euro zone, edged up to 58.6 in September, rising sharply from the 44 points registered in August and beating analysts’ expectations of a reading of 47.2. German No 1 economy in the Eurozone is still gaining momentum in light of positive improvements in the Euro member stated. A further rise to 59.4 is expected now.
7. Italian Trade Balance: Wednesday, 8:00. Italy’s trade surplus widened in July to 5.9 billion euro, up from EUR4.7 billion in the same month last year. However, exports declined 2.3% from June while imports rose 0.4%. Energy products were the main reason for growth in imports, a potential sign that Italy’s economy is beginning to stabilize after eight quarterly contractions in a row. Trade surplus is expected to narrow to 5.21 billion.
8. Inflation data: Wednesday, 9:00. Inflation in the Eurozone was tame in August despite the loose monetary policy exercised by the ECB. Lower prices of fuels further slowed the pace of inflation in August to its lowest level in several months. CPI in the 17-nation Eurozone rose 1.3% in August following 1.6% in July, marking the slowest pace of increase in four months. Core process advanced 1.1% Unchanged from July. European Central Bank (ECB) president, Mario Draghi said inflation pressures would remain tame for the rest of the year. The ECB projects prices in the 17 nations using the euro are expected to rise 1.4% this year and 1.3% in. CPI is expected to rise 1.1%, while core CPI is predicted to increase 1.0%.
9. Current Account: Thursday, 8:00. The eurozone’s current account surplus narrowed to 16.9 billion euros in July from 19.8 billion euros in June, worse than the 18.3 billion surplus anticipated by analysts. Over the 12 months to July, the current account showed a surplus of 204 billion euros, compared with a surplus of 79.4 billion euros a year earlier. Eurozone’s current account surplus is expected to widen to 17.7 billion.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week in the same range. It then dropped but held onto the uptrend support line and the 1.3460 line (mentioned last week). A recovery followed, but the pair couldn’t close above the 1.3570, and eventually ended the week at 1.3542.

Technical lines from top to bottom:

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. 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.

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

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.

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.

I remain bearish on EUR/USD

This is based on the assumption that the US will resolve its issues on time: it may be a temporary fix or a long term one, but a removal of the fear of default after the October 17th: (this Thursday) debt ceiling deadline will surely help the US dollar. While a resolution is partly baked in, the dollar still has room to gain.

In Europe, ECB president Mario Draghi is now less upbeat than in the recent rate decision: credit conditions are tightening, inflation is falling and new monetary tools are being talked about. Further hints about a rate cut or an LTRO could weigh on the euro.

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Asian stocks follow U.S. higher; Nikkei Jumps 1.6%

Asian stocks rallied Friday, following their U.S. counterparts higher on new policymakers in the U.S. are working to craft a deal that would end the government shutdown there. The shutdown, the first since the 1990s, is into its eleventh day. 

In Asian trading Friday, Japan’s Nikkei 225 jumped 1.6%. Earlier Friday, the Bank of Japan said that country’s corporate goods price index fell to 2.3% last month after an August reading of 2.4%. Analysts expected a September reading of 2.3%. 

In a separate report, BoJ said Japan’s M2 money supply was unchanged last month at 3.8%. The August number was revised up to 3.8% from 3.7%. Analysts expected a September reading of 3.7%. 

Hong Kong’s Hang Seng added 1.27% while the Shanghai Composite advanced 0.88%. Policymakers from both parties are expected to meet with President Obama late into Thursday night in the U.S. to hammer out a deal. 

In U.S. economic news out Thursday, the Labor Department said U.S. initial jobless claims rose to 374,000 last week, an increase of 66,000 from the previous week's unrevised figure of 308,000. 

Australia’s S&P/ASX 200 surged 1.7% ahead of some key Chinese data. China, the world’s second-largest economy, is due to release key export and import data. Chinese imports probably rose 7% in September from a year earlier after increasing by the same amount the previous month, Bloomberg reported. 

Economists are forecasting 5.5% export growth for September after a 7.2% in August. China is Australia’s largest export market. The data is due out Saturday. 

New Zealand’s NZSE 50 rose 0.54% while Singapore’s Straits Times Index added 0.53%. South Korea’s Kospi climbed 1.2% despite the won flirting with eight-month highs. 

S&P 500 futures rose 0.20% a day after the benchmark U.S. index soared 2.18%. 

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Forex Weekly Outlook October 14-18

The US dollar managed to gain against some currencies, as hope for a resolution to the political crisis outweighed fear of a US default for now. German economic sentiment, employment data in the UK and the US as well as US Philly Fed Manufacturing Index are the highlight events of this week. There are many pending US figures awaiting the end of the government shutdown. Here is an outlook on the major market-movers coming up.

The ongoing battle between Democrats and Republicans continued last week reducing chances for a debt crisis resolution. An intervention by central banks cannot be ruled out. However minutes released from the last FOMC meeting revealed tapering decision was quite close. Many FOMC members suggested partial tapering in light of the strong economic data release a while back but recent releases before the meeting raised fresh concerns among the policy makers regarding tapering therefore a dominant majority decided not to taper the Fed’s monthly purchases of mortgage-backed securities. Will a debt crisis resolution hoist the US economy back on track? Let’s Start

Updates:

1. UK inflation data: Tuesday 8:30. UK inflation fell to 2.7% in the year to August, from 2.8% in July. However prices move up quicker than salaries which increased 1.0% over the same period. The Bank refrains from raising interest rates despite elevated inflation, since unemployment rate is too high. Oil prices could further raise inflation, remaining stubbornly high. A further decline to 2.6% is expected now.
2. German ZEW Economic Sentiment: Tuesday, 9:00. German economic sentiment edged up to 49.6 from 42.0 in August, reaching the highest level since April 2010, beating market forecast for a rise to 46.0. This climb is a sign that German economy is strengthening further in light of the economic progress in the Euro-area. German economy picked up 0.7% in the second quarter, boosting investors’ hopes. A small drop to 49.2 is forecasted this time.
3. UK Claimant Count Change and Unemployment rate: Wednesday, 8:30. Britain’s unemployment rate narrowed unexpectedly in July to 7.7% from 7.8% in the preceding month, as the number of jobless citizens dropped by 24,000 to 2.487 million, the lowest jobless rate since September-November 2012. This was another indicator of the renewed strength in UK’s job market. Investors project that the job market improvement will continue and that the BOE will raise rates in December 2014. Bank of England Governor Mark Carney estimated that about 750,000 jobs would need to be added over the next three years for unemployment to fall to 7%. The number of jobless Britons is expected to decline by 24,300, while unemployment rate is predicted to remain unchanged at 7.7%.
4. US Unemployment Claims: Thursday, 12:30. The number of people applying for U.S. unemployment benefits soared by 66,000 last week to a seasonally adjusted 374,000. But the reading was skewed due to corrections in California and job cuts resulting from the government shutdown. However all in all the US labor market conditions are improving, despite recent volatility. A decline to 357,000 is expected now.
5. US Philly Fed Manufacturing Index: Thursday, 14:00. Factory activity in the U.S. mid-Atlantic region edged up to a 2-1/2-year high in September, reaching 22.3 from 9.3 in August. The reading was well above the 10.2 points anticipated by analysts. The gain occurred due to increase optimism about the near future. Respondents were also unusually optimistic, with the six-month business conditions index jumping to 58.2, the highest since September 2003, from 38.9 in August. A prior release from the Institute for Supply Management was also positive, showing the national factory sector grew at its fastest clip in more than two years in August. Philadelphia area manufacturing index is expected to decline to 15.4.
6. Chinese GDP: Friday, 2:00. The world’s no. 2 economy is expected to show stronger growth in Q3: 7.8%. Growth stood on 7.5% in Q2. While many have doubts about the quality of Chinese data, this figure is closely watched.
7. Haruhiko Kuroda speaks: Friday, 6:35. BOE Governor Haruhiko Kuroda will speak in Tokyo. He will probably address the US shutdown and its possible effects on the Japanese economy. His words will cause volatility in the markets.

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