EURUSD Outlook: Week of 2/23

by on February 23, 2014 5:49 pm BST

EURUSD has begun to challenge the current uptrend while maintaining a tight daily range between 1.3695 and 1.3760. The pair has found 1.3700/10 as support, but has challenged the level twice out of the last four sessions it rose above this level. The ascending trending is currently met near these support levels, and a compromise is likely to send the pair lower.

This week, the eurozone will report key consumer price index (CPI) figures as buzz around the region of deflationary pressures continue to circulate. Currently standing at .7 percent and steadily declining since 2011, the European Central Bank (ECB) President Mario Draghi said there are no signs of deflationary pressure even if prices further deteriorate.

Draghi made a pledge to do “whatever it takes” to save the euro, but there has not been a need to react as the euro has been inflated with the current risk environment. However, the ECB president said that the central bank is ready to take action if need be to ramp-up stimulus. “We don’t have any evidence of people postponing their expenditure plans with a view to buying the same thing at lower prices, in other words we don’t see what is defined to be deflation,” he said.

Deflation talk was deflected by Draghi by indicating that the euro-bloc has seen signs of economic improvement but acknowledge that it is not “strong, unambiguous developments.” The ECB has to be particular, but decisive, when addressing the weak economy and low inflation rate throughout the region. The benchmark rate has already been cut to historical lows of .25 percent, and there is an option of implementing negative deposit rates to force lending in order to spur growth. Nonetheless, Draghi said “we look at that, we stand ready to act.” Nothing the markets have not heard before.

The eurozone has made strides, but some wonder if economic progress is one of “one-step forward, two-steps back.” The German ZEW economic indicator can in lower than expected at 55.7, much lower than the 61.7 previously recorded and analyst hopes of a smaller decline to 61.3.

Peripheral countries, such as Spain and Italy, have seen positive steps in their manufacturing PMI data. However, Germany and France, widely considered the reason for the economic recession, continue to falter. French flash manufacturing PMI fell to 48.5, which has been in contraction territory since August 2011. Germany – the eurozone’s economic powerhouse – saw their flash manufacturing PMI fall from 56.5 to 54.7. The eurozone as a whole dropped one point to 53.

On the daily chart, if EURUSD did compromise 1.37, the price action will trade lower to the next level of support at 1.3675. The coming week will be important for the US dollar with initial jobless claims, prelim GDP and new home sales. It is likely that lower than expected data will be given a pass on weather, and the dollar could carry strength into the week.

Moving averages current give a positive sign, but a Fibonacci fan from the yearly low-to-high show that the first prong of support to coincide with the secondary level of price action support at 1.3615.

However, if the dollar shows weakness, EURUSD should retest current resistance at 1.3760 before seeing any hope for stronger resistance near 1.3802.

1D Chart of EURUSD

1D Chart of EURUSD