EUR/USD Forecast December 10-14

EUR/USD has an exciting week that began with a gradual climb and a sharp downfall, as Draghi dragged down the euro, below last week’s close. Where will the pair go from here? German ZEW Economic Sentiment and Flash PMIs are the main events on our calendar.  Here is an outlook on the main market-movers this week.

Following last week’s  ECB rate decision, president Mario Draghi hinted on a rate cut possibly at their next meeting after reducing ECB’s forecasts for the euro zone’s economy. The Bundesabnk followed with its own lower forecasts. Draghi,also opened the door for a negative deposit rate. Will these measures help the Eurozone recuperate in 2013? In the US, the headline Non-Farm Payrolls numbers were OK, but probably not enough to stop Ben Bernanke. Let’s Start

Updates: German Trade Balance came in at 15.2 billion euros, lower than the estimate of 15.9B. French Industrial Production declined 0.7%, well below the estimate of a 0.4% gain. Italian  Industrial Production also was sluggish, as the indicator fell 1.1%. The estimate stood at -0.2%. Sentix Investor Confidence came in at -16.8 points, below the forecast of -16.2. French Final Non-Farm Payrolls dropped 0.3%, matching  the forecast. The Eurogroup is  meeting  on Tuesday in Brussels. German ZEW Economic Sentiment  jumped 6.9 points, crushing the estimate of -11.4. Euro-zone Economic Sentiment also was sharp, moving up 7.6 points. The estimate stood at 0.1 points. The euro continues to test the 1.30 line. EUR/USD was trading at 1.294. German Final CPI came in at -0.1%, matching the forecast. French CPI declined by 0.2%.  The estimate  stood at 0.0%.   Eurozone Industrial Production fell for the second straight month, dropping 1.4%. This markets were expecting a slight gain of 0.3%. There are no scheduled releases on Thursday, but the markets will be keeping on eye on Brussels, which is hosting the EU Economic Summit and the Eurogroup Meetings. The euro has shown some movement following the Fed announcement to introduce Q4. EUR/USD moved as high as 1.30, but has since  retracted, and  was trading at 1.3074.

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

1. Greek Buyback Announcement: Monday. The deadline for holders of Greek bonds to bid in the buyback program ended on Friday. On Monday, Greek will announce the results of this operation: how much did Greece’s debt load drop. A successful operation is crucial for receiving the next tranche of aid. At first, Greek banks opposed this move, but eventually they seemed to have aligned with their so called “patriotic duty” – they will eventually receive capital injections is necessary.
2. French and Italian Industrial Production: Monday. France at 7:45 and Italy at 9:00. French industrial production plunged in September to a three year low, dropping 2.7% as company owners sentiment sharply declined. This reading followed by a 1.9% rise in the previous month, indicating France may be entering recession. Meanwhile Italy continued its downward trend declining 1.5% in September after a temporary rise of 1.7% in August, indicating Italy is in recession.0.4, -0.2
3. Sentix Investor Confidence: Monday, 11:30.  Sentix investor confidence in the euro zone improved for the third consecutive month, in November rising to -18.8 from 22.2 in October on higher economic situation and the expectations index, despite the sluggish readings in parallel indexes.  Economists expected the index to improve to minus 20.0 in November.  -16.2
4. German ZEW Economic Sentiment: Tuesday, 12:00. Germany’s economic sentiment declined unexpectedly by 4.2 points to -15.7 points in November, lower than the -10 expected by analysts. Current economic situation assessment declined by 4.6 points to 5.4 and economic outlook had scarcely changed in November, down 1.2 points to -2.6. Meanwhile ZEW Economic Sentiment, measuring German investors’ confidence for all of the euro-zone, edged down to -2.6 for November, down from -1.4 in October. -11.4, 0.1%
5. Industrial Production: Wednesday, 12:00. Industrial production in the 17-member eurozone dropped more than forecasted in September, down 2.5% from a modest rise of 0.9% in August amid the ongoing sovereign debt crisis. Output decreased in all industry sectors, adding to recession worries.0.3%
6. ECB Monthly Bulletin: Thursday, 11:00. The ECB monthly bulletin for November included the bank’s decision to cut growth projections and raise inflation outlook. Contraction rate increased to 0.5% from 0.3% in the previous month and inflation outlook remained above the 2.5% target while estimates stood at 2.3% and next year’s benchmark was raised to 1.9% from 1.7% in October.
7. EU Economic Summit: Thursday. Leaders from 27 EU nations gathered to form a long-term budget for the EU, concluded the meetings without reaching agreement. However European Council President Herman Van Rompuy, claimed that constructive discussions held during these meetings should enable an agreement early next year.
8. Eurogroup Meetings: Thursday. Finance ministers from 1 member countries in the eurozone will meet to approve the 34.4 billion-euro loan tranche to Greece. Eurogroup chief Jean-Claude Juncker will conclude his role at the end of this year, but the main Europgroup partners failed to reach an agreement for his replacement.
9. Flash PMI’s: Friday. November was another bad month for the Eurozone economy leading to its weakest quarter since 2009 recession. Eurozone’s flash service sector PMI dropped to 45.7, posting the lowest reading since July 2009, below predictions of a 46.1 reading, below the 50 point mark indicating contraction. Service sector in Germany, the largest euro zone nation contracted to 48 from 48.4 in October, weakening as the rest of the Euro members. French service PMI increased modestly to 46.1 from 44.6 but still indicating a slowdown. Likewise the Eurozone manufacturing PMI edged up to 46.2, from 45.4 in October but still signaling steep rates of decline.  French Purchasing Manager’s Index in manufacturing increased to 44.7 from 43.7 in October, while French manufacturing sector improved to 44.7, compared to 43.7 recorded October, but still indicating recession is here to stay. A modest improvement is expected in the Eurozone, Frane and Germany; French Manufacturing PMI is expected to reach 44.9, the eurozone 46.6. Service sector is expected to show gains in  France  45.8, Germany 50, and the eurozone 47.
10. Inflation data: Friday, 12:00. The annual  inflation rate  in the 17-nation Eurozone edged down to 2.5%, in line with estimations from 2.6% in September. ECB President  Mario Draghi  said inflation risks are “very low”. Meanwhile core inflation  is also on a downside trend as the recession spreads to additional countries.  The core inflation rate, excluding volatile costs such as energy, alcohol and tobacco, reached at 1.5% in October. Following the same reading in the previous month. CPI is expected to reach 2.2% while Core CPI is forecasted to gain 1.5%.

*All times are GMT.

EUR/USD Technical Analysis

€/$ began the week with a nice climb toward the 1.3080 line (mentioned last week), which worked perfectly well for the first time. A second attempt already reached 1.3126 before the pair started retreating. It then collapsed, hung on to 1.2960 at first, and then free fell, finding support only at 1.2880 before closing at 1.2926.

Technical lines from top to bottom:

1.34 was a stubborn cap during the spring of 2012 and is the far line in the distance. Below, 1.3290 served as resistance before the pair collapsed in May.

1.3170 worked very well as a double top during September 2012 and is now the top frontier of the range. A failure to get closer to this line shows that the pair has limited momentum. 1.3130 proved to be strong resistance during December 2012.

1.3080 capped the pair in September and then again in October and December. 1.3030 provided some support at the same period of time, and also at the end of November 2012. Both are minor in comparison with the next line.

The very round 1.30 line was a tough line of resistance for the September rally. In addition to being a round number, it also served as strong support. It recently worked as a battleground and the pair is now ready for another battle around this line. It is closely followed by 1.2960 which provided some support at the beginning of the year and also in September and October – the line is strengthening once again after temporarily cushioning the fall during December.

1.2880 provided some support in October and also in late November and December. It proved to be a backstop on the initial false rally after Obama’s victory. 1.28 is the bottom border of the range, and was eventually left behind. The pair fell to this low in September and later got close to it.

1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now a pivotal line in the range.  1.2690 was the new low after the November breakdown, and also provided support on a second downfall attempt in November 2012.

1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.

Below, the round number of 1.25 is not only of high psychological significance (USDEUR 0.80) but also worked as support during the summer of 2012. 1.2440 is already a stronger line, that was a clear separator during August.

Below, 1.2390 was resistance in July. 1.2250 is lower support, also at that time.

Long Term Downtrend Resistance Weakening

The line extending from the 2011 peak of 1.4940 (a green line on the chart) was breached during the first week of December, but is in play once again. It is weaker now.

Narrowing Channel Broken Again

Euro/dollar broke below the old narrowing channel that once dominated its range trading (black lines).