Last week's trading sessions saw EURUSD come off considerably after having closed the week before almost unchanged. The pair started the week off by gapping higher on Monday to make its weekly high of 1.3785 before then leading lower. The pair then fell sharply after Moody's Investor Services warned the market that it might have to make a multiple notch downgrade for Irish debt. The rating agency noted that the rescue package from the EU and the IMF would, "crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign's debt burden." Over the previous weekend, the Irish government had agreed to the joint EU/IMF bailout program, which is currently estimated to be between 80 and 100 Billion Euros.
EURUSD continued its sharp fall on Tuesday after reports of artillery fire between North and South Korea combined with the continuing financial issues in the Eurozone to send the pair lower. Nevertheless, Spain was able to raise 3.26B Euros in Treasury bills, which was on the lower end of the estimated 3-4B Euros that the debt auction was expected to raise. The Euro also came off despite a slew of relatively positive economic releases coming out of the Eurozone. These releases included German Flash Manufacturing PMI that came out at 58.9 compared with a consensus of 57.0, and German Flash Services PMI came out at 58.6 compared with an anticipated 55.9. In addition, Eurozone Flash Manufacturing PMI came out at 55.5 compared with an anticipated 54.4, while EZ Flash Services PMI printed at 55.2 compared with the 54.4 number anticipated. Also, the German GfK Consumer Climate survey was also favorable at 5.5 compared with an anticipated 5.1. In terms of U.S. releases out last Tuesday, Preliminary U.S. GDP came out at +2.5% for the quarter, compared with an anticipated +2.3%, while Existing Home Sales fell to 4.43M from 4.5M that was lower than the consensus call of 4.51M. Also out on Tuesday was the FOMC's Meeting Minutes for their November 2nd and 3rd meeting. The minutes showed that the FOMC had approved the Fed's new QE II package by a near unanimous vote of 10-1. The committee also downgraded its estimates for future unemployment, which is now projected within the 8.9% to 9.1% range for 2011, while U.S. inflation is now anticipated to rise somewhat but still stay below 2%. The committee also revised its growth estimate that now has U.S. GDP projected to grow by 2.4% to 2.5% for 2010, 3.0% to 3.6% for 2011, 3.6% to 4.5% for 2012 and 3.5% to 4.6% for 2013.
EURUSD continued dropping on Wednesday despite the German Ifo Business Climate survey printing at 109.3 compared with an anticipated 107.6. Nevertheless, EZ Industrial New Orders fell by -3.8% that was considerably worse than the fall of -2.6% anticipated. With respect to U.S. releases last Wednesday, Core Durable Goods Orders fell by -2.7% for the month that was significantly lower than the anticipated rise of +0.7% anticipated, although the previous number was revised significantly higher from -0.8% to +1.3% which neutralized the dollar-negative impact somewhat. U.S. Durable Goods also fell by a large -3.3% compared with an anticipated rise of +0.2%, but the previous number was revised upward from +3.3% to +5.0%. Also out on Wednesday was the University of Michigan's Consumer Sentiment Indicator which printed at 71.6 compared with an anticipated 69.5, and Initial Jobless Claims improved to 407K compared with an anticipated 434K. Nevertheless, U.S. New Home Sales came out at 283K that was considerably lower than the 311K anticipated.
On Thursday, EURUSD consolidated somewhat as U.S. markets were closed in observation of the Thanksgiving Day Bank Holiday, and no major Eurozone economic releases came out.
The rate then resumed its fall on Friday, making its weekly low of 1.3199 as the market speculated on whether Spain and Portugal might be the next Eurozone countries in line for a bailout from the IMF and the EU. The Dollar also benefitted from safe haven buying as geopolitical tensions increased among North and South Korea. In terms of economic releases out last Friday, German Preliminary CPI increased by +1.0% for the month compared with an anticipated flat reading, while the EZ M3 Money Supply increased by +1.0% for the year compared with an anticipated +1.3% increase. EURUSD then managed to recover a bit on short covering head of the weekend to end the week at 1.3247, showing an impressive fall of -3.3% net from the previous weekly close.
Fundamental Outlook for EURUSD
The primary market-moving economic data releases and policymaker speeches scheduled for this coming week in the Eurozone and the United States are as follows:
Eurozone:
The economic data week coming up in the Eurozone cools down somewhat in comparison with last week, and its important releases will feature the ECB Rate Decision scheduled for release on Thursday.
Since Monday has nothing of note scheduled for release, the somewhat active week starts on Tuesday with the release of the German Unemployment Change (-19K), the CPI Flash Estimate (+1.9% y/y), the EZ Unemployment Rate (10.1%), Italian Preliminary CPI (+0.1% m/m), and the Italian Monthly Unemployment Rate (8.3%). In addition, ECB President Trichet will give a speech in Brussels.
Wednesday will then offer German Retail Sales (+1.3% m/m) and EZ Final Manufacturing PMI (55.5).
Thursday's calendar includes EZ PPI (+0.4% m/m), Revised EZ GDP (+0.4% q/q), as well as the highlighted ECB Rate Decision and its associated ECB Press Conference in which the central bank is anticipated to keep its benchmark Minimum Bid Rate unchanged at the 1.00% level.
Friday then will end the moderately active week with EZ Final Services PMI (55.2), EZ Retail Sales (+0.4% m/m), and ECB President Trichet will give a speech in Paris.
United States:
The economic data week coming up in the United States is somewhat more active than last week, and the economic calendar will feature important U.S. employment data like the key Non Farm Payrolls number that is scheduled for release on Friday.
Monday will begin the quite active week with the tentatively scheduled release of the important U.S. Treasury Currency Report.
Tuesday will then offer the S&P/CS Composite-20 HPI (+1.2% y/y), the Chicago PMI (60.1), the CB Consumer Confidence survey (52.8), and Federal Reserve Chairman Ben Bernanke will give a speech in Columbus.
Wednesday's calendar looks particularly busy with Challenger Job Cuts (-31.8% y/y), the important ADP Non-Farm Employment Change (70K), Revised Nonfarm Productivity (+2.4% q/q), Revised Unit Labor Costs (-0.2% q/q), ISM Manufacturing PMI (56.3), Construction Spending (-0.3% m/m), ISM Manufacturing Prices (70.9), Crude Oil Inventories (last 1.0M), Total Vehicle Sales (12.1M), and the important Fed Beige Book all scheduled for release. FOMC Member Yellen will also give a speech in New York on Wednesday.
On Thursday, traders will be watching for Initial Jobless Claims (425K), Pending Home Sales (-0.9% m/m) and Natural Gas Storage (last -6B) to be released. Also on Thursday, FOMC Member Bullard will give a speech in Washington D.C., and FOMC Member Duke will give a speech in Philadelphia.
Friday will conclude the notably busy week with the scheduled release of the highlighted Non-Farm Payrolls data (+143K), in addition to the U.S. Unemployment Rate (9.6%), Average Hourly Earnings (+0.2% m/m), ISM Non-Manufacturing PMI (54.7) and Factory Orders (-0.7% m/m).
The Technical Picture for EURUSD
On the technical front, EURUSD gapped up at last week's open, but then peaked at 1.3785 and fell sharply to fill the gap. The rate then extended its previous week's losses by coming off as far as 1.3199 on Friday before closing a bit higher at 1.3247, showing an impressive fall of -3.3% net from the previous weekly close.
The rate currently seems to be furthering a deeper pullback now that the 23.6% or 1.3713 and the 38.2% or 1.3362 Fibonacci retracement levels of the move from 1.1876 up to 1.4281 have given way. Although the 14-day RSI is approaching oversold territory at 33 that could provoke a bounce during the coming week, no signs of divergence are yet appearing and the indicator remains firmly in a down trend. As a result, this sharp down move in the pair could still result in additional losses below 1.3199 toward the 50% or 1.3079 and 61.8% or 1.2795 Fibo retracement levels, especially if EURUSD continues to sustain losses below its medium term upward slanting former support trend line now drawn at 1.3253 that should now offer some resistance. The important break of this key trend line has now neutralized the former bullish outlook for the pair while it traded within a slightly diverging upward channel like pattern with an upward sloping resistance line that can now be drawn at 1.4629.
Furthermore, the rate also continued to trade last week below the key 61.8% Fibonacci retracement level at 1.3896 of the down move from 1.5144 to 1.1876, although it managed to bounce from just above the 38.2% level at 1.3124. Once again, this does not support a bullish outlook until the market moves back above 1.3896 at which point the rate's former 100% target level at 1.5144 would be reactivated.
In addition, as a result of the recent pullback in EURUSD, the rate now trades just above its 200-day Moving Average that is reading 1.3132 and has started sloping slightly downward thereby yielding a neutral medium term outlook for the pair. A sustained break below this important medium term indicator would be additionally bearish for the pair.
Also, the Bollinger Bands for EURUSD have widened considerably after last week's volatile price action. The rate has been bouncing along its lower Bollinger Band in the most recent decline that could now offer some support in the 1.3070 region. In addition, the indicator's center moving average line is now falling and provides resistance at 1.3659 along with the upper Band that now comes in well above the current exchange rate level at 1.4234.
From an Elliott Wave perspective, the corrective move to the upside in EURUSD seen since the 1.1876 low of June 7th has thus far shown two relatively impulsive waves, with an intervening correction. This move has now apparently completed a zig zag correction, with its final C wave peaking at 1.4281 that began at 1.2586 on August 24th. The future near term direction for the rate now appears to be downward in yet another zig zag correction that seems to have already completed waves A and B, with a strong C wave to the downside still likely to come that should dominate trading over the coming week. Fibonacci Projection targets of the length of A off of the top of B at 1.3446 for the C wave that began at 1.3785 are 1:1 = 1.2950, 1:1.236 = 1.2753, 1:1.382 = 1.2631, 1:1.5 = 1.2533, 1:1.618 = 1.2434, and 1: 2 = 1.2115.
With the rate having closed last Friday at the 1.3247 level, the chart for EURUSD now shows support at 1.3199, at 1.3019 and in the 1.2903/21 region. Resistance to the topside is seen at 1.3343, at 1.3446 and in the 1.3776/85 region.
Overall, this technical scenario now looks as though the medium term corrective rally in EURUSD is in the process of correcting lower in a sharp zig zag pattern that should stay below the recent 1.4281 high point in the near term. Furthermore, other signs also indicate that a medium term top may now be in place and the medium term diverging up channel pattern has now broken convincingly to the downside. Accordingly, medium term traders may wish to consider selling EURUSD on rallies unless the 1.4281 level breaks decisively to the upside.
Furthermore, shorter term traders may also wish to consider selling rallies in EURUSD ahead of its former medium term trend line now at 1.3253 and its 200 day MA that is currently reading1.3132. An initial profit taking level could be suggested at the A=C wave equality objective of 1.2950, and below that at the 1:1.618 Fibo projection for the C wave at 1.2434.
Figure 1: Daily candlestick chart of EURUSD showing its 200-day MA in red, Bollinger Bands in green, Fibonacci Retracement levels in royal blue, Trend Lines in purple and the 14-day RSI in the indicator box in pale blue.
