EUR/USD Forecast May 19-23

EUR/USD had a second consecutive week of falls, but it managed to close above the lows and above uptrend support. Where is it headed next? Another busy week awaits the pair, with PMIs and the German IFO figure standing out. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.

The euro received no mercy from the ECB after Draghi’s statement about imminent action in June. More reports and comments from the Bank pushed the currency lower. In addition, the weak growth rate of 0.2% in Q2 certainly weighed on the common currency. German growth is not sufficient, and looking at the ZEW index, it is not necessarily that strong either. In the US, data remains generally positive, but far from outstanding. Let’s start:

Updates:

• May 19, 14:51: Chinese Deceleration Triggers Reversal: The sound of China cracking can be heard across the global financial system this morning. Numbers published over the weekend...
• May 19, 11:38: The yen picks up: The yen has been quietly appreciating over the past week and overnight has touched key levels on USDJPY and elsewhere....

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

1. German Buba Monthly Report: Monday, 10:00. The German central bank forecasted a slowdown in growth during the second quarter after a pickup in the first three months of 2014. Growth in industrial orders has subsided  from the rise in the first two months and the cold weather conditions which partially affected the first quarter are expected also to squeeze the rate of growth in the second quarter. The Bundesbank forecasted a 1.7% annual growth in 2014 and 2.0% expansion in 2015.
2. German PPI: Tuesday, 6:00. Producer prices in Germany plunged 0.3% in March, contrary to analysts’ forecast of a 0.1% rise. Factory process fell 0.9% on the year. Lower energy prices were the main reason for the drop in prices. Excluding energy prices, the producer price index remained on the month and down only 0.3% on the year. This tame inflation is expected to remain in the coming months with a slight rise only later this year. Producer prices are expected to remain unchanged.
3. Current Account: Wednesday, 8:00 Current Account dropped to €21.9bn in February, following €25.3bn in January. The Italian Global Trade Balance for February was €2.62, sharply below January’s reading of €3.65bn. ECB president, Mario Draghi, argued that the Eurozone is not making sufficient progress in it’s ongoing battle against disinflation. Draghi may be forced to act if inflation remains subdued in fear of a deflation trend. Current Account is expected to improve to €24.2bn this time.
4. Consumer Confidence: Wednesday, 14:00. Consumer sentiment unexpectedly rose to -8.7 in April, after posting -9.3 in the previous month. Improvement in the EU unemployment rate has contributed to this rise. Following these positive signs, retail sales as well as car sales have expanded. The ECB forecasted a 1.2% growth rate for the Eurozone in 2014 rising to 1.8% in 2016. Consumer sentiment  is predicted to rise further to -8.
5. Manufacturing and Services PMIs: Thursday. French manufacturing sector lost momentum in April, dropping to 50.9 from 52.1 in the previous month. Analysts’ expected the sector to reach 51.9. Meanwhile, the services also declined to 50.3 from 51.5 registered in March, while economists expected the reading to remain unchanged at 51.9. Germany’s manufacturing sector advanced for the first time this year in April reaching 54.2, beating estimates for a 53.7 reading. Meanwhile, the services sector also improved to 55.0 from 53.0 in March. Analysts expected a milder rise to 53.5.Both indicators remained above the 50 point line for the tenth and eleventh month in a row, respectively. Markit’s flash Eurozone Services PMI climbed to a 34-month high in April, reaching 53. Meanwhile, the Manufacturing PMI jumped to 53.3, marking a 3-month high indicating a strong opening for the second quarter. French Manufacturing is expected to reach 51.1, while Services are predicted to drop to 50.3. German Manufacturing is predicted to decline to 54.0 while services are expected to improve to 54.8. The Eurozone Manufacturing is expected to drop to  53.2, while services are expected to decline to 53.0.
6. German Ifo Business Climate: Friday, 8:00. German business confidence edged up unexpectedly in April, reaching 111.2 from 110.7 on March. German manufacturing and services activity expanded at the fastest pace since 2011 sustaining Germany’s position as the leading force in the Eurozone economy. The outlook for the economy remains mostly positive, but there are also risks such as trade uncertainty with Russia following the Ukraine crisis and slower activity in emerging markets. German business confidence is expected to reach 111.0.
7. Belgian NBB Business Climate: Friday, 13:00. Belgian business confidence declined unexpectedly in April, dropping to -4.6 from -4.4 in March. Economists anticipated a rise to -2.3. Declines were registered across the board except for a modest rise in the manufacturing industry. Business confidence is likely to decline further to -4.7.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with some range trading above the 1.3740 line mentioned last week. It then fell sharply, and could never retake this line. Support was found at 1.3650, which is now stronger.

Technical lines from top to bottom:

We begin from lower ground this 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, especially after the bounce in May. 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. After a dip, the pair managed to retake the line, but it remains close.

I remain bearish on EUR/USD

The ECB wants a lower value of the euro and it is still unsatisfied. More pressure from the Draghi and co. is likely and also action seems more and more real and not a bluff. In addition, there are good reasons to act, with the recovery looking more fragile than beforehand, even in Germany. In the US, the lower yields weigh on the greenback, but economic growth and stronger inflation certainly keep the taper train firm on the track. All in all, a second attempt to break below uptrend support has better chances of succeeding now.