EUR/USD Forecast March 24-28

EUR/USD was not able to conquer 1.40 and was eventually hit hard. Is this a temporary dip or a change of courseFlash manufacturing and services PMIs, German Ifo Business Climate and inflation data are the main market-movers this week. Here is an outlook on the main events ahead.

The disappointing ZEW economic sentiment from Germany only had a temporary effect, and it seemed that the euro could still move higher. But later came Janet Yellen: the Fed tapered bond buys once again and Yellen also released a comment about raising rates. The resulting dollar strength sent EUR/USD below uptrend support. The Russia – Ukraine crisis is humming in the background.

Updates:

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

1. Flash Manufacturing and Services PMIs: Monday. The Euro-area advanced modestly in the services sector but slightly disappointed in the Manufacturing sector. The Eurozone manufacturing Purchasing Managers’ Index reached 53.0, following January’s final reading of 54.0 and below expectations of 54.2. Services PMI reached 51.7, after a final reading of 51.6 in January. The decline in the manufacturing sector indicated recovery is still fragile. German manufacturing sector reported a weaker than expected reading of 54.7 compared to January’s final reading of 56.5 and analysts’ expectations of 56.3. However, services PMI edged up to 55.4 after a final January reading of 53.1 and analysts’ forecast of 53.4. All in all, German economy continues to lead the Eurozone’s recovery. Contrary to Germany, France continued to disappoint with a 48.5 reading in the manufacturing sector after getting close to expansion in January and the services sector fell to 46.9, compared to a previous reading of 48.9 and analysts’ expectations of 49.4. French Manufacturing is expected to rise to 49.8 and its service sector to 47.9. German Manufacturing is predicted to decline to 54.7 and services to 55.8. The Eurozone Manufacturing is expected to remain at 53.2 and services are also expected to remain unchanged at 52.6.
2. German Ifo Business Climate: Tuesday, 9:00. German business sentiment unexpectedly advanced in February to the highest reading in 2 1/2 years indicating a solid growth trend in Europe’s largest economy. The survey revealed sentiment edged up to 111.3 from 110.6 in January, beating forecasts of a 110.7 reading. Domestic demand is constantly improving and German GDP also gained 0.4% in the last quarter suggesting Germany will continue to be the locomotive of Europe this year. A decline to 110.9 is expected now.
3. GfK German Consumer Climate: Wednesday, 7:00. German consumer confidence boosted to a seven-year high of 8.5in March following 8.3 in February. This improvement demonstrates the German economy’s strength. The Majority of responders were confident in Germany’s growth trend this year. High job security and growing incomes as well as low inflation helped to boost consumer confidence. German consumer confidence  is expected to remain at 8.5.
4. M3 Money Supply: Thursday, 9:00. The euro zone’s M3 money supply increased more-than-expected in January rising an annualized rate of 1.2%, following 1.0% in December 2013. Economists expected a smaller advance of 1.1% . However, loans to private sector dropped at a pace of 2.2% annually, compared to expectations for a 2.1% decline, after falling 2.3% in December. M3 money supply is expected to increase 1.3%.
5. German Import Prices: Friday, 8:00. Germany’s import prices continued to decline in January, contracting 0.1%, slightly lower than expected, following a flat reading in December 2013. In a yearly base, import price index dropped 2.3% while economists expected a 2.4% drop in January. The main reason for this decline was falling energy prices and non-ferrous metal. A rise of 0.3% is anticipated now.
6. German CPI: Friday. Germany’s inflation increased in February, rising 0.5%, mainly due to price increases of food products. On a yearly base, CPI was 1.2% higher than in February 2013. The European Central Bank defines price stability as an annual average inflation rate of just below 2% over the medium term. The tame inflation enables the ECB to maintain rates unchanged. Inflation is expected to rise by 0.4%.
7. French Consumer Spending: Friday, 7:45. French consumer spending fell sharply in January, dropping 2.1% from a 0.2% gain in the previous month. Lower spending on energy and new cars, was the main reason behind this fall. The reading was far worse than the 0.8% drop anticipated by analysts. Durable goods acquisitions declining by 4.3% and auto spending weakened by 7.7%. Consumer spending is also affected by worries about unemployment. The European Commission stated that consumer spending would be the make-or-break factor for the French economy this year. French consumer spending is expected to climb 1.0%

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week capped by the 1.3940 level (mentioned last week). It then dropped and reached a low of 1.3750 before staging a modest recovery towards 1.38.

Technical lines from top to bottom:

The all important round number of 1.40 is of high political importance. We have seen how getting close to the line triggered a critical comment that sent it down. Below, 1.3940 served as resistance back in 2011.

The 2013 high of 1.3895 is the top line looming above and it is becoming more important. The round number of 1.38 is now a pivotal line in the range. It served as resistance in December.

1.3740, which provided some support at the end of 2013 is now key support to the downside. The round number of 1.37, is another support line after capping the pair in December.

1.3650 provided support in December and worked as resistance in September 2013, and is also a significant line. Also the February rally fell short of this line. Below, 1.3560 worked as good support twice during February 2014.

The January 2014 low of 1.3515 provides minor support on the way down. 1.3450 worked as resistance in August 2013 and as support in September and October. It is now a key line on the downside.

Broken uptrend support

The pair clearly secured a break below the uptrend (thick black line on the chart) that accompanied the pair since February.

I turn from bearish to neutral on EUR/USD

EUR/USD might find a new balance in these levels. The fresh tightening intentions of the Fed are certainly dollar supportive, but they might be watered down and / or sidelined after the storm we have seen. Flows into the euro-zone from China into the euro-zone support the common currency, but if the exchange rate nears 1.40 once again, there is a good chance we will hear again from Draghi, and this could cap any euro rise. All in all, we could have a balanced week before the key events in the next one.