EUR/USD had an interesting week, in which it managed to emerge from the lows and end higher. Can it break out of range? Industrial Production, the ECB Monthly Bulletin and inflation data are the highlights of this week. Here is an outlook on the major events and an updated technical analysis for EUR/USD.
After the ECB left the rates unchanged for a second month in a row, Mario Draghi reassured that the central bank keeps track of money markets to prevent further damage to the euro and promised to deal with falling inflation in the Euro area without specifying the means of action. This hurt the euro, but the pair was later aided by news from the other side of the Atlantic. The US Non-Farm Payrolls badly disappointed with a gain of only 74K. The drop in the unemployment rate only marginally helped, and left a lot of confusion. What will be the next driver of the pair? Let’s start:
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EUR/USD daily chart with support and resistance lines on it. Click to enlarge:
- Italian Industrial Production: Monday, 9:00. Italian industrial production edged up more than expected in October, increasing 0.5% following a 0.2% gain in September. Consumer goods production increased 0.8% in October from September but energy products declined by 0.9%. Economists expected a more modest climb of 0.3%. On a yearly base, Italy’s industrial production dropped 0.5% in October from the same month a year earlier, posting the 26th consecutive monthly decline. Nevertheless, October’s fall was significantly lower than the 2.9% decline in the prior month. Another gain of 0.6% is expected now.
- French CPI: Tuesday, 7:45. France’s consumer prices index, remained unchanged in November following a decline of 0.1% a month earlier. On a yearly base, the inflation rate increased by 0.7. Economists expected a modest rise of 0.1%. Food prices increased by 0.1%, manufactured goods, also grew by 0.1%, however a 1.2% fall in transport and communication activities pulled down the total services’ costs by 0.1%. Likewise, energy prices declined by 0.6% on falling costs of petroleum products. French CPI is expected to reach 0.4%.
- Industrial Production: Tuesday, 10:00. Euro zone industrial output edged down sharply in October, dropping 1.1% contrary to market forecast of a 0.4% gain. This decline was preceded by a 0.2% fall in September suggesting recovery is still a long way off. The Eurozone exited recession in the second quarter but came to a stand still in the third quarter. Downside risks continue to cloud the Eurozone’s recovery with high unemployment rate and low business confidence. The ECB cut rates in November in hope this move will aid growth. A gain of 1.6% is predicted this time.
- Trade Balance: Wednesday, 10:00. The euro zone trade surplus nearly doubled on a yearly base in October, aided by a modest rise in exports and a fall in imports, indicating an improvement in external economic activity, but weaker domestic demand. The trade surplus reached 17.2 billion euros ($23.62 billion) in October, compared with 9.6 billion euro surplus a year ago and following 12.4 billion euros in the previous month. This report showed an improvement in the weaker southern region with a 5% rise in exports from Greece and Spain and a 4% gain in Portugal. A smaller surplus of 16.7 billion euros is expected now.
- German Final CPI: Thursday, 7:00. Inflation in Germany edged up 0.2% on a monthly bases in November after a 0.2% decline in the previous month. The rise was in line with market consensus. The main reason behind the low inflation is the falling prices of mineral oil products, down 6.5%, while food prices advanced 3.2%. The average inflation for the twelve months back was 1.1%, below the 1.5% average in November 2012. Another rise to 0.4% is predicted this time.
- ECB Monthly Bulletin: Thursday, 9:00. The European Central Bank stated in monthly bulletin on December that it would continue to monitor market rates and will not allow them to rise too much to aid economic recovery. The editorial of the bank’s bulletin was identical to its main policy statement, presented by ECB President Mario Draghi after the rate cut meeting. The ECB will continue its forward guidance policy as well as provide liquidity. This release will show what the ECB thinks about inflation and the lack of it, towards recent decision.
- Inflation data: Thursday, 10:00. According to the preliminary release, consumer prices in the euro zone rose by a low rate of 0.8% in December, with core inflation falling to 0.7%. These numbers will probably be confirmed. Core inflation is lower than in October. October’s numbers triggered the rate cut.
* All times are GMT
EUR/USD Technical Analysis
Euro/dollar started the week with a rise, but it fell short of the 1.3675 line (mentioned last week). It then dropped to support at 1.3550, more than once. A late rally on the NFP fell short of the round 1.37 line and with a struggle around the 1.3675 line.
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 was the 2013 peak (excluding the post-Christmas break). The failure of the pair to get close to this line for a second time might make it a top for a long time, despite the false break. 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. It also stalled a recovery in January 2014 and is a key line right now.
1.3615 worked as resistance in December, as an upper bound for the range. The line is becoming weaker now. Below, 1.3550 worked as support as January 2014 and also beforehand. It is a key line to the downside.
1.3450 worked as resistance in August 2013 and as support in September and October. 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 support convincingly broken
From early November, the pair trended higher, riding above an uptrend support line. As mentioned last week, it was hard for the pair to hold onto the line for too long. The break below was certainly painful.
I am neutral on EUR/USD
On one hand, Draghi indeed hurt the euro, and the danger of deflation is certainly present. This weighs on the euro. The ECB might have to act later in the year to support the system, and this could keep the euro depressed.
On the other hand, the steam ran out of the dollar due to the NFP. All other figures are positive, and the we still might see a positive revision and another dose of tapering in January, pushing EUR/USD lower. However, for the upcoming week, the headline NFP is set to counter any euro weakness.
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