EUR/USD Forecast March 3-7

EUR/USD had an excellent week, breaking the double top and reaching a 2 month high. Is this the beginning of a big rally or just a short lived move? Manufacturing and Services PMI’s, German Industrial Production and the all important rate decision are the highlights of this week. Here is an outlook on the major events and an updated technical analysis for EUR/USD, now on higher ground.

Euro-zone inflation did not fall and remained at 0.8%, while core inflation even went up. This key event for the ECB decision had a huge impact on the euro which rallied strongly. It wasn’t all good for the euro earlier in the week, as soft German inflation and the deterioration int he Ukraine and China hurt it, despite solid German business sentiment. In the US, the picture has improved after terrible data, especially with a jump in new home sales and an OK GDP release. And now, it’s time for the Draghi show. Let’s start:

Updates:

• Mar 3, 8:53: Currency wars could return as deflation threats loom: The spectre of deflation is making the rounds again and could become a major driver of forex activity and even...
• Mar 3, 8:31: EURUSD: Builds Pressure On The 1.3893 Level: Our outlook on EUR/USD remains higher following a sharp rally the past week. As long as it can trade and...

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

1. Manufacturing PMIs: Monday. Manufacturing sector in the Eurozone has finally returned to growth for the first time in more than four years, lifting hopes for a brighter future. The index edged up to 54 in January from 52.7 in December, rising above the preliminary estimate of 53.9. All the readings surpassed the flash estimates released two weeks earlier indicating a positive growth trend. Both Italy and Spain showed robust growth in output and in new orders. Spain soared to 52.2 from 50.8 in December and Italy maintained a positive reading of 53.1 a bit lower than the 53.3 released in December but still showing improvement.
2. Mario Draghi speaks: Monday, 14:00. ECB President Mario Draghi is scheduled to speak at the European Parliament in Brussels. Draghi may talk about the ongoing growth trend in the Eurozone but may also give clues on the possibility of further rate cuts in the ECB’s next monetary policy meeting in light of slow inflation. Market volatility is expected. It will be interesting to hear how he sees the surprising rise in inflation. Here is one possible explanation
3. Spanish Unemployment Change: Tuesday, 8:00. The number of Spanish unemployed increased unexpectedly in January, rising by 113,000 following a decline of 107,600 on December. However, this was the smallest increase for January since 2007, according to the report, indicating a gradual improvement  and stabilization of the labor market.
4. PPI: Tuesday, 10:00. Euro zone producer prices advanced in December for the first time in three months, rising 0.2% after a 0.1% fall in November. However this small gain did not ease fears of a possible deflation trend which could threaten the fragile recovery in Europe. Producer prices increased 0.2% from November, but were 0.8% lower than in December 2012. Prices edged down in October and November, by 0.5% and 0.1%, respectively. In case low inflation continues it will make it difficult for the euro zone to reduce its large debts.
5. Services PMIs: Wednesday. The services sector for the Euro-area expanded in January, advancing for six consecutive months. Eurozone’s final Purchasing Managers’ Index showed an expansion of 51.6 points in January, slightly better than the 51 release in the previous month but a bit lower than the 51.9 projected by analysts and the flash estimate released earlier. Nevertheless, the last figures indicate an ongoing improvement and a good start to the year. Services sector in Italy continued to improve to 49.4 from 17.9, nearly touching the 50 point line but still in contraction, while services in Spain climbed in January to 54.9 from 54.2 in December remained in the expansion territory for the third month in a row.
6. Retail PMI: Thursday, 9:10. Eurozone retail PMI in January rose for the first time in five months, reaching 50.5 after posting 47.7 points in the previous month. However, Germany was the key factor of this expansion, posting solid improvement in trade since August. France disappointed with a fall in sales showing a slower pace than in December, whereas Italy saw another solid decrease. Another good sign was an easing in layoffs but buying levels kept falling slightly faster.
7. German Factory Orders: Thursday, 11:00. German factory orders unexpectedly fell by 0.5% in December on weaker domestic demand. German companies were hesitant to invest while their neighbors were struggling to recover. The reading was preceded by a 2.4% rise in November. However if the Eurozone succeed to improve, German economy is expected to boost its growth in 2014.
8. Rate decision: Thursday, 12:45, press conference at 13:30. There is a now a low chance that the ECB will lower the lending rate to 0.10-0.15% and set a negative deposit rate of 0.10%. While there is a danger that low inflation might move from the short term to the medium term, and that the ECB could act according to its mandate, as it did in November, the small rise in core inflation gives breathing space to Mario Draghi and company. The high exchange rate of the euro in recent months weighs on exports and lowers prices. With the high exchange rate of the euro, the growing pressure from the IMF and others and the exhaustion of the talk about of negative rates without action, the ECB could have better chances to act.. A negative rate would send the euro tumbling down, while no action would send the euro a bit higher. However, Draghi is more lightly to try to talk the currency down or allow the non-sterilization of bonds in the SMP program before going into the uncharted territory of negative rates.
9. German Industrial Production: Friday, 11:00. German industrial output declined unexpectedly in December, dropping 0.6% from November indicating Europe’s locomotive is affected by the weakness of its neighbors. Industrial production in November picked up by 2.4%. German economy is expected to expand strongly this year but, turmoil in emerging markets and a fragile recovery in rest of the 18-nation euro area, could weigh on growth. Nevertheless, economists are optimistic regarding future growth due to recent improvements in the Eurozone.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with perfect range trading between the 1.37 and the 1.3773 lines (mentioned last week). After dipping to 1.3650, the pair recaptured 1.37 and then jumped all the way to 1.3823 before ticking lower.

Technical lines from top to bottom:

We begin from higher ground this time. The all important round number of 1.40 is of high political importance. Below, 1.3940 served as resistance back in 2011.

The 2013 high of 1.3895 is the top line looming above. 1.3830 was a more serious peak that was seen with better volume and was challenged afterwards in 2013.

1.3773 was a cap in February and beforehand in December 2013 and now switches to strong support. 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.

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.

Steep uptrend support lost and recaptured

Since early February, EUR/USD is riding on a sharp uptrend support line (thick black on the chart). It lost it temporarily only to recapture the line shortly afterwards. The steep line is hard to follow.

I am bearish on EUR/USD

After the EUR/USD rally, it is not easy to be bearish. The surprising inflation numbers from the euro-zone (which contradict German data) triggered a strong euro-rally, and this certainly changes the prospects for the rate decision. Nevertheless, the inflation level is still low and the exchange rate is uncomfortable for both export growth and for import related inflation. Draghi may certainly try to play down the currency.

In the US, it seems that the bleeding of terrible data has stopped and has stabilized: GDP was OK and so were new home sales and durable goods orders. The message from the Fed is clear: a lot is needed to derail the taper train. Even a mediocre NFP would be dollar positive, as it affirms more QE tapering in Yellen’s first decision.