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.

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Forex - USD/JPY weekly outlook: October 21 - 25

The dollar ended the week lower against the yen on Friday amid concerns that the Federal Reserve will extend its stimulus program to support the economy following the U.S. government shutdown.

USD/JPY ended Friday’s session at 97.78, down 0.14% for the day, after hitting lows of 97.56. The pair ended the week with losses of 0.87%.

The pair is likely to find support at 96.81, the low of October 9 and resistance at 98.14, Friday’s high.

The dollar initially hit three-week highs against the yen on Thursday after the U.S. Congress passed a bill to reopen the government and raise the debt ceiling, with just hours to spare ahead of a deadline to avert an unprecedented sovereign debt default.

The deal will fund the government until January 15 and raise the government borrowing limit until February 7. Both sides also agreed to talks over broad budget issues in an attempt to reach a longer-term deal by December 13.

But the dollar weakened across the board amid fears that the impact of the government shutdown on the already fragile economic recovery would prompt the Fed to delay plans for tapering its asset purchase program until at least early next year.

The possibility of another debt crisis also loomed, as the temporary solution does not resolve the underlying budgetary issues dividing Republicans and Democrats.

In the week ahead, U.S. data releases will be in focus after the shutdown delayed the release of some key economic reports. The Department of Labor is to publish the September nonfarm payrolls report on Tuesday and data on durable goods orders is to be published on Friday.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, October 21

Japan is to release data on the trade balance, the difference in value between exports and imports.

The U.S. is to release private sector data on existing home sales, a leading indicator of demand in the housing sector.

Tuesday, October 22

The U.S. is to publish the September nonfarm payrolls report, which had been originally scheduled for release on October 4.

Wednesday, October 23

The U.S. is to publish data on import prices, a leading contributor to inflation.

Thursday, October 24

The U.S. is to release the weekly report on initial jobless claims, as well as data on new home sales.

Friday, October 25

Japan is to publish data on consumer price inflation, which accounts for the majority of overall inflation.

The U.S. is to round up the week with data on durable goods orders, a leading indicator of production, as well as revised data on consumer sentiment from the University of Michigan.

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Forex - Weekly outlook: October 21 - 25

The dollar fell to fresh eight-month lows against the euro on Friday and was broadly weaker against the other main currencies amid expectations that the Federal Reserve would keep its stimulus policies in place for longer in order to safeguard the recovery following the U.S. government shutdown.

The dollar came under heavy selling pressure on Thursday after the U.S. Congress passed a bill to reopen the government and raise the debt ceiling, with just hours to spare ahead of a deadline to avert an unprecedented sovereign debt default.

The deal will fund the government until January 15 and raise the government borrowing limit until February 7. Both sides also agreed to talks over broad budget issues in an attempt to reach a longer-term deal by December 13.

EUR/USD ended Friday’s session at 1.3684, 0.07% higher for the day, after rising to 1.3703, the highest since February 1 earlier. For the week, the pair gained 0.95%.

The dollar was weaker against the yen, with USD/JPY settling at 97.78, 0.14% lower for the day after hitting session lows of 97.56. The pair ended the week with losses of 0.87%.

The drop in the dollar came amid fears that the impact of the government shutdown on the already fragile economic recovery would prompt the Fed to the delay plans for scaling back its stimulus program until at least the start of next year.

The possibility of another debt crisis also loomed, as the temporary solution does not resolve the underlying budgetary issues dividing Republicans and Democrats.

The dollar ended Friday’s session almost unchanged against the pound, with GBP/USD at 1.6165, down from highs of 1.6224. The pair ended the week with gains of 1.22%.

Elsewhere, the Australian dollar hit four-month highs against the greenback on Friday after official data showed that China’s economy expanded at an annual rate of 7.8% in the third quarter, after annual growth of 7.7% in the three months to June.

AUD/USD settled at 0.9676, the highest since June 4 and ended the week with gains of 1.71%.

In the week ahead, U.S. data releases will be in focus after the shutdown delayed the release of some key economic reports. The Department of Labor is to publish the September nonfarm payrolls report on Tuesday and data on durable goods orders is to be published on Friday.

Meanwhile, the U.K. is to release preliminary data on third quarter growth, while the Bank of England is to publish the minutes of its latest policy meeting. The euro zone is to release data on manufacturing and service sector activity as in addition to the Ifo index of German business climate.

Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets.

Monday, October 21

Japan is to release data on the trade balance, the difference in value between exports and imports.

Germany is to produce data on producer price inflation, a leading indicator of consumer inflation.

Canada is to publish a report on wholesale sales, a leading indicator of consumer spending.

The U.S. is to release private sector data on existing home sales, a leading indicator of demand in the housing sector.

Tuesday, October 22

The U.K. is to release data on public sector net borrowing.

Canada is to produce data on retail sales, the government measure of consumer spending, which accounts for the majority of overall economic activity.

The U.S. is to publish the September nonfarm payrolls report, which had been originally scheduled for release on October 4.

Wednesday, October 23

Australia is to publish an index of leading economic indicators as well as data on consumer price inflation.

The BoE is to release the minutes of its latest policy meeting, which contain valuable insights into economic conditions from the bank’s perspective.

The Bank of Canada is to announce its benchmark interest rate and publish its rate statement, which outlines economic conditions and the factors affecting the monetary policy decision. The announcement is to be followed by a press conference.

Thursday, October 24

New Zealand is to publish a report on the trade balance.

China is to release the preliminary reading of the HSBC manufacturing index.

The euro zone is to release preliminary data on manufacturing and service sector activity, a leading indicator of economic health. Germany and France are also to release individual reports.

The U.K. is to publish private sector data on industrial order expectations. Later in the day, BoE Governor Mark Carney is to speak; his comments will be closely watched.

The U.S. is to release the weekly report on initial jobless claims, as well as data on new home sales.

Friday, October 25

Japan is to publish data on consumer price inflation.

The Ifo institute is to release a report on German business climate, a leading indicator of economic health.

The U.K. is to publish preliminary data on third quarter gross domestic product, the broadest indicator of economic activity and the leading indicator of economic growth.

The U.S. is to round up the week with data on durable goods orders, a leading indicator of production, as well as revised data on consumer sentiment from the University of Michigan.

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