EUR/USD Forecast May 12-16

EUR/USD had an exciting week, getting very close to 1.40 before crashing German ZEW Economic Sentiment, GDP data, Industrial production and final inflation figures are the major events on our calendar. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.

The ECB did not touch the interest rates and Draghi read out only known mantras in the written statement and EUR/USD got closer to 1.40. But then came the bomb: a move in June is something “the ECB is comfortable with”. This sent the euro plunging down. Was this yet another trick to push the value of euro down? Learning from the second move down to a one month low, we can say that at least for now, the markets take Draghi seriously. Can this move continue? Let’s start.

Updates:

• May 12, 0:17: EURUSD: Weakens, Extends Bearish Momentum: EUR extended its weakness on Friday following through on the back of its Thursday losses. Support lies at the 1.3737...

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

1. German ZEW Economic Sentiment: Tuesday, 9:00. The major index of economic expectations for Germany fell for the fourth straight month in April to 43.2 following 46.6 in March, amid fears of escalation in the Ukraine conflict, while current conditions surged again to its highest level since July 2011 reaching 59.5 compared to 51.3 in March. Economic expectations for the Eurozone meanwhile edged down 0.3 point to 61.2 in April. Current conditions by contrast rose 6.2 points to -30.5. Economic Sentiment for Germany is expected to drop to 41.3, while economic climate for the Euro-area is predicted to edge up to 63.5.
2. German Final CPI: Wednesday, 6:00. The German numbers have a significant contribution to the overall inflation numbers and the Germans certainly have a say regarding ECB moves. Germany initially reported a monthly drop of 0.2% in prices, with a small rise to 1.1%y/y figures. A confirmation of these numbers is expected now.
3. Industrial Production: Wednesday, 9:00. Industrial output in the euro-area increased by 0.2% in February, in line with market consensus. Expansion was driven by a 0.6% rise in intermediate goods and a 0.5% increase in non-durable consumer goods. Electronic components posted the strongest growth of 11.5%. The increase indicates that economic recovery in the Eurozone is building momentum. Industrial output is expected to decline 0.3% this time.
4. GDP figures: Thursday. Europe’s economy enjoyed growth in the last quarter of 2013. Eurozone GDP advanced by 0.3% in the fourth quarter, compared to 0.1% growth in the third. The rise was 0.5% higher than the same period in 2012. The fourth-quarter pick-up driven by a return to growth in France and Italy, expanding quarterly for the first time in two and a half years. France increased growth by 0.3% over the quarter, slightly stronger than expected, after a flat growth in the third quarter. Germany, the Eurozone’s largest and strongest economy, reported growth of 0.4% quarter-on-quarter, thanks to strong exports. Italian GDP for the final quarter of 2013 inched by 0.1% following a 0.1% decline in the third quarter, in line with analysts’ expectations. The Eurozone is expected to expand by 0.4%, France by 0.4%, Germany is expected to climb 0.7% and Italy by 0.2%.
5. ECB Monthly Bulletin: Thursday, 8:00. ECB monthly bulletin for April detailed the Governing Council’s decision to hold interest rate at the current low level after examining the latest developments in the euro area. The first-quarter readings suggested continued modest with stronger domestic demand. However, risks for euro area economic outlook remain persistent. Inflation remains at low levels with medium to long-term inflation expectations remain firmly anchored in line with price stability. The Governing Council stated that all available monetary tools will be exercised if needed It will be interesting how worried the ECB really is after the talk about an imminent move.
6. Inflation data: Thursday, 9:00. According to the initial numbers for April, euro-zone inflation rose from the bottom, to 0.7% in inflation and 1% in core inflation. The mix of a low level of inflation but not the lowest seen raised the uncertainty towards the ECB decision. Officially, we expect a confirmation of these levels, but a downgrade cannot be ruled out.
7. French Non-Farm Payrolls: Friday, 6:45. French Non-Farm work force increased by 0.1% in the last quarter 2013 after a 0.1% fall in the third quarter. Analysts expected a further decline of 0.1% in the last quarter. French labor market is expected to contract by 0.1% this time.
8. Trade balance: Friday, 9:00. The euro zone’s trade surplus increased in February from a year earlier expanding to 15.0 billion euro, from 13.9 billion in January. The rise occurred amid stronger exports with imports remaining unchanged. Exports edged up 3% on the year, after a 1% rise in January, while imports were flat when from a year ago. The Eurozone is showing stronger domestic demand, which increases economic activity. Exports also continue to rise except for Greece. Germany, Europe’s locomotive, saw exports rising by 2.6% in February and imports up by 0.8%. The bloc’s second-largest economy, France, reported a 1.2% monthly increase in exports, with imports falling 7.3%. The euro zone’s trade surplus is expected to increase further reaching 17.3 billion euros.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar started the week with a swift move to the upside, making a clear break above the 1.3905 level (mentioned last week). An attempt to break above 1.40 failed and resulted in a downfall, with the pair closing below the 1.3785 support line.

Technical lines from top to bottom:

1.4105 provided support for the pair during August 2011. It is followed by 1.4055, which worked as a lower line in that period of time.

The all important round number of 1.40 is now even stronger after the pair was clearly rejected there in early May. Below, the 2014 high of 1.3964 will be closely watched.

The April peak of 1.3905 serves as minor resistance. It is followed by 1.3865 which capped the pair during the same time as well.

1.3830, which was a long serving 2013 peak comes back into the focus after capping the pair in March 2014 and serving as a clear separator several times. 1.3785 worked as support for the pair during April and served as resistance beforehand.

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.

Trending lines

Uptrend support accompanies the pair since late February and remains intact. Downtrend resistance was broken, but the pair fell back to range. The uptrend support line remains the more important line.

I remain bearish on EUR/USD

Draghi’s “bomb” will probably continue sending ricochets. He made it clear that a move is imminent and markets certainly believe him. In theory, a lower value of the euro during May could push inflation higher, and this in turn can push back a move. However, given recent trends, inflation remains low and this will probably be confirmed once again.

In the US, the economy is not really accelerating, but continues growing steadily - enough to keep the QE tapering scheme running, and this leaves the euro to its vulnerabilities.