EUR/USD Forecast for January 16 – 20, 2012

EUR/USD had another up and down week which ended in a new 16 month low. The forthcoming week features the significant ZEW survey and inflation statistics plus other events. Here’s an outlook for the approaching events, and an updated technical analysis for the pair.

At the beginning, things went well for the euro – the single currency enjoyed Draghi’s confidence concerning the accomplishment of the LTRO operation. The aversion of a credit crunch is far from certain, after Friday’s proceedings. France lost its wonderful AAA rating, collectively with other euro-zone countries. Further more, Greece is on the edge of default after the talks regarding a haircut broke down. Will the ECB substitute the private sector and take a hit on Greek bonds? Greek banks are in bad shape than anticipated. Together with the collapse of Greek PSI talks, the Greek troubles are not priced in.

German WPI: Publication time unknown at the moment. Wholesale Price Index in Europe’s #1 economy has seen a shocking jump in prices last month, 0.7 percent. No change is likely now.

German ZEW Economic Sentiment: Tuesday, 10:00. This is one of Europe’s most significant surveys. After 9 successive drops, this 350 strong survey finally became stable, although at low ground. The score of -53.8 reflects deep negativity and low prospect for the economy. A fairly similar score is anticipated now. The less-important euro-wide figure will probable remain around -54.1 points seen last month.

CPI: Tuesday, 10:00. After a few stubborn months at 3%, the CPI dropped to 2.8% (yearly) in the preliminary publication. This will likely be established now. Core CPI will probably tick down from 1.6%. Note that the ECB pays less concentration to inflation now, and focuses on growth and the debt crisis.

Current Account: Thursday, 9:00. Europe’s wide measure of the balance of goods, services, cash, etc. jumped to a deficit of 7.5 billion euros last time. A lesser deficit is expected now.

ECB Monthly Bulletin: Thursday, 9:00. One week after the market moving rate conclusion, we will get to see the information upon which policymakers were making their decisions. This will shed light on how the central banks see the economy.

German PPI: Friday, 7:00. Producer prices in Germany have stabilized and rose by very small numbers of late. No change is expected after last month’s rise of 0.1%.

* All times are GMT

EUR/USD Technical Analysis

EUR/USD began the week with a drop down to 1.2660. It then traded between this line and the 1.2873 cap before falling as low as 1.2623 but closed above the 1.2660 line.

Technical lines from top to bottom:
1.3212 held the pair from falling and switched to resistance later on. Very important resistance is at 1.3145 which was the lowest point recorded in October 2011, was only broken for a short time from the other side.
1.3085 was the top border of a very narrow range that characterized the pair towards the end of 2011. It also provided support back in December 2010 and had a pivotal role. The round number of 1.30 is psychologically important and also worked as some support. After the breakdown, it was shattered and is now weak.

The relatively new low of 1.2945 is still important, and now as clear resistance. 1.2873 is the previous 2011 low set in January, and still provides resistance. This was seen over and over again.
1.2760 is a pivotal line in the middle of a recent range. It provided support early in the year. 1.2660 was a double bottom during January and the move below this line is not confirmed yet. 1.2623 is the current 2012 low, but only has a minor role now.

A more important line is 1.2587, the trough of August 2010. This line will be closely watched on any move downwards. A break below this line will send the pair to levels last seen 18 months ago.
Even lower, 1.2520 is another minor support line, before the round number of 1.24, which was of importance a long time ago.

1.2330 is also an ancient pivotal line, that now works as support. The last important line for now is 1.2144.

Downtrend channel
The pair can be seen as trading in a parallel, yet wide channel. Downtrend resistance is more significant than downtrend support, even thought it dates back only to December. Downtrend support starts in October, but is far from the pair at the moment.

Remain bearish on EUR/USD
The debt crisis has certainly worsened now. The breakup of talks between the banks and Greece paves the road for a Greek default, and it might turn ugly. Also the downgrade of France and Austria has severe consequences on the whole bailout concept, as the EFSF bailout fund will likely see a downgrade.
The ECB managed to buy time with the banks through the LTRO, but will have to step up its efforts: either by taking a hit on its Greek bonds, or by buying more peripheral bonds to help stabilize the system. Either way, this is a lose lose situation for the euro, that is not fully priced in.