EUR/USD Forecast June 3-7

Eur/Usd advanced cautiously for a second week in a row, but eventually closed under 1.30. The focus now shifts to the euro-zone, with the all important rate decision. Will we see a negative deposit rate, or hints of one? There are quite a few additional important events. Here is an outlook on the main market-movers awaiting us and an updated technical analysis for EUR/USD.

Last week, German data continued its indecisive trend: German employment numbers showed an unexpected increase of 21,000 unemployed in April, missing predictions for a 4,000 rise. Meanwhile euro-zone inflation rose to 1.4%, but this is still under the ECB’s target. Euro-zone unemployment reached 12.2%. Will a negative deposit rate help the economies? Looking at the recent comments from ECB officials, there is certainly a lively debate.There is no doubt that a negative rate is euro-negative. In the US, the QE tapering question remains open after mixed data also on the other side of the Atlantic. Will EUR/USD make a big break out of the range? Let’s start.

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

1. Manufacturing PMIs: Monday. Markit’s PMI business survey revealed recession is still around in the Eurozone’ manufacturing sector, prompted the ECB rate cut in May. Italy climbed slightly to 45.5 from 44.5 in March and Spain reached 44.7 in April from 44.2 in the previous month. Both Italy and Spain showed a continuous contraction in manufacturing activity. The Eurozone Manufacturing PMI came in slightly higher to 46.7 from 46.5 in March still showing negative growth. The euro zone economy reached its fifth straight quarter of contraction and is predicted to continue this negative trend in the first quarter of 2013. The expected readings are: Spain  45.5, Italy 46.2 and the Eurozone 47.8.
2. Spanish Unemployment Change: Tuesday, 7:00. Jobless claims fell for the second consecutive month in April, down by 46,050, offering slight relief to Spain’s battered labor market. However the improvement was mainly due to seasonal hiring in the hostelry sector. Spanish Active Population Survey (EPA) showed a record number of 6.2 million people out of work, in the first quarter as the jobless rate soared 27.2%. However, these figures may indicate a turning point in the Spanish economy toward an economic recovery. Another reduction of 50,200 is expected this time.
3. PPI : Tuesday, 9:00. Euro zone producer prices in March declined for the first time in four months down by 0.2%, following a 0.2% gain in February, amid 0.6% fall in energy costs. The European Central Bank cut its interest rate by a 0.25% to a record low of 0.50% and offering liquidity to the euro zone. A similar drop of 0.2% is forecasted now.
4. Services PMIs: Wednesday. Euro-area services and manufacturing production decreased for a 15th straight month in April. Spain contracted to 44.4 from 45.3, lower than the 45.8 predicted; Italy edged up slightly to 47 from 46.5 in March, a bit higher than the 46.3 forecasted and the Eurozone climbed moderately to 47 from 46.6. All figures were still below the 50 point line, indicating contraction. The euro-area economy is expected to shrink more than previously estimated in 2013 amid a worsening in the job market. The PMI results are broadly consistent with GDP declines at a quarterly rate of 0.4% to 0.5% in April. The projected figures are: Spain 45.3, Italy 47.5 and the Eurozone 47.5.
5. Retail Sales: Wednesday, 9:00. Retail sales in the eurozone declined for the second consecutive month in March, falling 0.1% following a 0.2% decline in February. On a yearly base, retail sales edged down further by 2.4%, underlining the struggle of the eurozone to emerge from their long recession. Spending cuts were visible in clothes and computers. Spain saw the biggest decline, with retail sales down 10.5% compared with the same month last year. A further decline of 0.2% is anticipated.
6. German Factory Orders: Thursday, 10:00. German factory orders edged up unexpectedly in March; climbing 2.2% following the same rise in February, suggesting Europe’s largest economy is starting to expand again. Economists forecast a 0.4% drop. Orders for German exports climbed 2.7% while orders from the Eurozone soared 4.2% indicating the Euro area is also starting to improve. A small drop of 0.2% is expected now.
7. Rate decision: Thursday, decision at 11:45, press conference at 12:30. Given the comments from various ECB members regarding a negative deposit rate, the internal debate about the next policy move will likely be “lively”. However, after cutting the main lending rate last month, the ECB might pause for now, despite falling inflation, an ongoing recession and a relatively strong currency that impedes export growth. We have a better chance of seeing Draghi making thick hints about a policy change in the next meeting: making it clear that a negative deposit rate is high on the agenda. This could significantly weigh on the euro during June.
   
8. German Trade Balance: Friday, 6:00. German seasonally adjusted trade balance showed a surplus of €17.6 billion in March, amid a 0.5% rise in exports and 0.8% increase in Imports compared to February. Following an significant contraction in the fourth quarter of 2012, the Bundesbank forecasted that German economy will contract in the first quarter of 2013 but the figures demonstrated a 0.1% expansion. Surplus is expected to narrow to €16.5 billion.
9.  French Gov Budget Balance: Friday, 6:45. French Government Budget Balance declined to a seasonally adjusted -31.0B Euro in March, from -27.1B Euro in the preceding month. Analysts expected French Government Budget Balance to fall -28.0B Euro.
10. German Industrial Production: Friday, 10:00. German industrial production surprised with a 1.2 jump in March compared with the previous month, a further encouraging sign that Europe’s leading economy is on a recovery path. Analysts have predicted a 0.1% drop. Together with an upbeat in factory orders things are starting to look better for the German economy. No change is expected now.

*All times are GMT

EUR/USD Technical Analysis

Euro/dollar began the week with a first challenge of the 1.30 line (mentioned last week), forming a double top. It then dropped to 1.2840 in perfect range trading. A second move higher was eventually successful. But after a failure to sit over 1.3050, the pair returned back to the range and ended the week at 1.2995.

Live EUR/USD chart:

Technical lines from top to bottom:

We start from a higher point this time. The round line of 1.34 served in both directions when the pair traded in higher ground. 1.3350 provided support when the pair traded higher in February.

1.3290 served as resistance before the pair collapsed in 2012, After many failures to break higher, the euro finally pushed through. 1.3255 provided support during January 2013 and also beforehand. A recovery attempt failed to reconquer this line.

1.32 is a clear top after capping the pair twice in April 2012 and then in May. This is a round number as well. 1.3160, which separated ranges in May 2013 is a critical line.

1.3100 is a minor line after working as temporary resistance in December 2012. It is followed by 1.3050, which proved be strong support in May 2013, defending the round number in more than one occasion, and also working as resistance.

The very round 1.30 line was a tough line of resistance and is becoming stronger after serving as a double top in May 2013. In addition to being a round number, it also served as strong support and recently worked as a pivot line. 1.2940 is the next line of support, replacing 1.2960. It worked as such during April and May 2013.

Lower, 1.2890 worked in both directions during 2012 and was the beginning of the uptrend support line. It is somewhat weaker now. 1.2840 worked as a cushion for the pair during May 2013 and is a pivotal line at the moment.

Lower, the round number of 1.28 was the bottom of a long term wide range in 2012 and its breach in May 2013 was not confirmed. Below, 1.2750 worked as a separator of ranges during November, and stopped the pair’s drop in March. This is a key line on the downside, as clearly shown in the first week of April. This is followed by the round number of 1.27, which is a minor line.

1.2624 was a swing low in January 2012 and remains important on any break to the downside. It is followed by the veteran line of 1.2587.

Triangle 

As the thick black lines on the chart show, a narrowing channel can be seen on the chart. Downtrend resistance began in late April and was touched twice since then. Uptrend support began in mid May. The pair is closer to resistance at the moment.

I am bearish on EUR/USD

The focus now returns to Europe and its issues: an ongoing recession, the call for the ECB to “manage the euro lower” and  the talk about negative rates which now culminates in the rate decision. Even if no decision is made this time, Draghi is likely to drag the euro lower, given the sorry state of the euro-zone.  And while bond yields of Italy and Spain remain low, recent auctions show that they could rise once again, especially after we have seen once again that the Japanese are not buying foreign bonds, but actually selling them.

In the US, the debate about QE tapering continues as data is mixed: a small rise in pending home sales in comparison to a stronger rise in house prices. In any case, it seems clear that the next move of the Fed will be to reduce bond buys rather than to increase them, and there is a  growing notion it will happen this year. Jobs are the key.

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