EUR/USD Forecast Sep. 22-26

Eur/Usd failed to recover, and eventually fell to a new 14 month low. Is this the pair set to continue declining? A speech by Mario Draghi, PMIs and an important German survey are the highlights. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD, now on lower ground.

The first installment of the ECB’s targeted loans (TLTROs) received a lukewarm reception, with a take up of only €82.6 billion. This was below all estimates and suggests that the ECB might have to implement a large ABS program or outright QE. The central bank can be marginally encouraged by an upwards revision in August’s headline inflation to 0.4%. However, business confidence dropped once again in Germany. In the US, the Fed kept its language regarding interest rates unchanged, but did lay out guidelines for exiting the stimulus and it now sees higher rates in 2015 on average. This gave a big boost to the dollar. Can this monetary policy convergence continue weighing on the euro?

Updates:

• Sep 22, 10:33: EUR/JPY Riding on a Monster Trend Line – At Major Turning Point: The Euro suffered a major setback against the US dollar this past week, but somehow managed to hold the ground...
• Sep 22, 10:22: EUR/USD Sep. 22 – Recovering from the blows ahead of Draghi’s testimony: EUR/USD is ticking higher in the wake of the new week, but it is only able to recover some of the losses...

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

1. Mario Draghi talks: Monday, 13:00. The president of the ECB goes to the European Parliament to testify. An updated assessment of the economy and inflation is likely to raise interest, as well as the ECB’s latest measures. Any optimism will lift the euro while pessimism is set to hurt it. Hints about further monetary stimulus will rock the markets, especially after the recent rate cuts and the ABS announcement.
2. Consumer Confidence: Monday, 14:00. This official survey of around 2300 consumers fell to -10 points, reflecting growing pessimism – the worst since the beginning of the year. Another fall to -11 points is expected now.
3. Flash PMIs: Tuesday: 7:00 in France, 7:30 in Germany and 8:00 for the whole euro-zone. The forward looking purchasing managers’ indices for September are expected to remain similar to last month’s numbers: contraction in French manufacturing (from 46.9 in August to 47.1 expected now), hardly growing French services (50.3 to 50.2), weak German manufacturing growth (51.4 to 51.3 points), solid German services (54.9 to 54.6), weak euro-zone manufacturing growth (50.7 to 50.6) and OK euro-zone services growth (53.1 points in August to 53.2 points now). The French and German figures have the strongest impact.
4. German Ifo Business Climate: Wednesday, 8:00. Like the ZEW indicator, also IFO, Germany’s No. 1 think-tank, is showing an erosion in business confidence. The 7000 strong survey is predicted to show a slide from 106.3 to 105.9 points now.
5. Belgian NBB Business Climate: Wednesday, 13:00. While coming from a small country, this is usually a good bellwether to the whole euro-zone. Business climate ticked up to -7.3 points in August and is expected to continue edging higher to -7.1 points now. The negative number means worsening economic conditions.
6. M3 Money Supply: Thursday, 8:00. The ECB monitors the amount of money in circulation as another measure of inflation. Growth has accelerated from the lows, and now stands at 1.8% y/y. Another move up to 1.9% is expected now.
7. Private Loans: Thursday, 8:00. While money in circulation is growing, private loans are squeezing, and this weighs on growth. After a slide of 1.6% y/y last month, a small improvement to -1.5% is expected now.
8. German GfK Consumer Climate: Friday, 6:00. This survey of 2000 German consumers disappointed with a drop to 8.6 points in August. Another slide to 8.5 is predicted now.
9. German Import Prices: Friday, 6:00. Prices of imported goods serve as yet another measure of inflation, or lack of. After a bigger than expected slide of 0.4% in July, a more moderate one of 0.2% is expected now.

* All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week trading between the 1.2920 and 1.2960 lines (mentioned last week) before going in different directions: the pair got close to the round 1.30 before falling, making another attempt to rise and eventually closing on lower ground: 1.2822.

Live chart of EUR/USD:

Technical lines from top to bottom:

1.3295 is the first line for now: it was the low level in November. 1.3220 is the pre-gap line and now serves as important resistance.

1.3175 worked in both direction during 2013 and served as the bottom line of the range in August 2014. 1.3150 is was a low during August and now serves as resistance.

Below, the round number of 1.31 served as resistance several times, and the all important figure below is 1.30, which is more than a round number.

Below 1.30, we find support at 1.2960 which capped the pair’s recovery attempts after it fell to lower ground. The 1.2920 level was the initial low and has now turned into a pivotal line.

1.2860 is the recent 2014 low and is now key support. Very close, 1.2840 served as support in June 2013 and is the next line before the round number of 1.28, which also worked as support at around the same period of time.

1.2750 was the low where the pair traded last time it was around these levels: July 2013. This is followed by 1.2660 – a key line to the downside, which marks the beginning of long term uptrend support.

Here is a closer look at the recent trading levels, using the hourly chart:

Long term uptrend line still fought over

After downtrend support was left behind, we are now reaching a much older line, which accompanied the pair since November 2012 and was touched twice in 2013 and since forgotten. The pair broke below the line, but managed to give another fight.

I remain bearish EUR/USD

Monetary policy convergence is the name of the game, and it just intensified: the ECB will probably have to do more after the slow start with expanding its balance sheet by 1 trillion euros and this could mean more direct forms of QE. This is especially true as the economy is still stumbling along and we’ll get fresh data now. In the US, the FOMC is gradually becoming more hawkish as QE is just one step from its final end and as data improves. Down to where can this divergence send the pair? The ECB will probably feel comfortable only around 1.20-1.25.