EURUSD Outlook: Week of 3/2

by on March 3, 2014 10:14 am BST

EURUSD seen upside against the US dollar after closing last week on 1.3800, which has been a significant level of resistance. The euro has traded higher on weak fundamentals and an expectation that the European Central Bank (ECB) will not have to act even though the economy in the 17-nation bloc continues to stagnate.

Economists see the ECB not having to act as consumer price data increased a minuscule tenth-percent to .8 percent, yet inflation has remained lower than the central bank’s two percent target since March 2013 and under one percent since last October. “The inflation numbers were better than expected, and some of the expectations for a rate cut next week have been tempered,” said Brian Daingerfield, FX strategist at Royal Bank of Scotland PLC. ECB President Mario Draghi could stay away from the benchmark rate, but he could potential introduce negative deposit rates to encourage lending, which recent figures show a continued lack of lending.

Hedge funds and large speculators lighted up on the amount of short futures contracts going into this week’s ECB meeting on “up-beat” CPI data. “Europe just doesn’t look that bad on a relative basis. When you put it altogether, there’s a less negative inflation outlook,” according to Shahab Jainoos, senior FX strategist for UBS. The eurozone is doing so well that unemployment remained at 12 percent, which Draghi contributes to the low inflation. According to Eurostat, unemployment has remained at 12 percent since edging off the record high of 12.1 in September – baby steps.

Consumers are still weary with the confidence gauge falling from negative 11.7 to negative 12.7. As analysts see the economy strengthen throughout the euro-bloc, consumers are worried about the continued weak labor market and expectation of savings.

The weekly chart shows price action lingering at 1.3800 for the third time since October, and it is looking like there could be two scenarios: a triple top or a “W” breakout.

EURUSD has seen rather significant sell-offs all three times 1.3800 has been reached, and supporting indicators are suggesting that a pullback is likely. The RSI is somewhat neutral at 55, but it is beginning to tick downwards. Also, the + DMI is starting to rollover, which this could lead into a test of support nearing 1.3715 with secondary support at 1.3620.

The “W” breakout is the bullish scenario as price action made a higher-low after the second pullback, but a close above 1.3800 will be needed to confirm a continued move upwards. If so, the EURUSD has the potential to see resistance at 1.3930 with a much higher resistance level of 1.4075 (highly unlikely unless there is a large pullback of the dollar).

WK Chart of EURUSD

WK Chart of EURUSD

Early this morning, Spanish manufacturing PMI data came in higher than the previous month at 52.5 versus 52.2, but it was lower than the 53.2 estimate. Italian manufacturing PMI data was weaker than expected at 52.3 opposed to the 53.7 estimate. It also fell below last month’s print of 53.1.

Mario Draghi will speak in front of the Committee on Economic and Monetary Affairs of the European Parliament today.

On Thursday, the ECB will release their rate decision, and the language out of the ECB this week will be highly important. Draghi is likely to reiterate the unstable recovery, but it is very possible the central bank will cut deposit rates in order to avoid a cut from the .25 percent benchmark rate.