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During the previous several weeks we witnessed an appreciation of the U.S. dollar against the euro. This tendency was broken in the last week and the euro finished at $1.2976 on Friday, marking a weekly increase of 1.7%.

On the economic field of both sides of the Atlantic the news was not so bright, with budgets and fiscal talks taking much of the energy. The political agenda in Europe was focused on attempts to find suitable-for-all solutions to the European 2013 - 2020 budget and the next aid tranche to Greece. As a Bloomberg article suggests, there are some signs that a solution for releasing the Greek aid would be found soon.

The U.S. fiscal cliff becomes more and more visible to all the parties involved. Finding a solution by lifting the debt limit again is the most widely promoted idea. The FED's chairman Mr. Bernanke told the New York Economic Club last week that the policy makers should resolve the fiscal cliff danger by using creativity to provide a fiscal clarity (Source: Marketwatch). The task of delivering a slimmer budget without harming the recovery seems an especially hard one, so the markets seem to bet on lifting the debt limit again. This would just postpone (and possibly increase) the problem but in short to near term, it would lift the risk appetite and provide a reason for the euro and stocks to advance.

In case the debt limit is not lifted an increased demand for safe haven currencies like the USD, JPY or CHF could be expected.

Among the lack of particular political decisions on the matters which weigh on both Europe and the U.S., the economic and market data took the lead and determined the EUR/USD direction. The better-than-expected U.S. housing data from the first two days of the last week were at the beginning of the euro rally. Later Spain managed to achieve lower yields on all the three auctions it held. This further intensified the euro gains. Other possible reasons could be found in the commitments of traders report.

Commitments of Traders

COT long short

Since the end of October, 2012, the noncommercial traders (those who do not use the futures for hedging their economic activities) started to increase their short positions. The L/S ratio (long/short open positions) went close to its lowest level since the beginning of September 2012 and the short positions took about 80% of all the open interest.

We can also see that the short positions for the last 3 months were almost the same as their average value. The long ones remained less that their average size.

The technical picture of the EUR/USD rate however hardly warranted such a strong concentration of short positions. The closing of many opened short positions because of surprisingly good economic data, and the perspectives of finding political solutions to many of the problems the regions are facing, might have been among the main reasons for the euro increase we witnessed. The important question now is whether this is the beginning of a more long term uptrend for the euro or not.

The economic data which is expected to be delivered next week, could provide some directions.

The Week Ahead

The current week will provide data on consumer confidence and inflation measures in Europe and the U.S., unemployment in Europe and Germany, durable goods in the U.S., and, probably one the most widely watched indicator, the U.S. GDP. The majority of data is expected to be better than the previous values, especially the U.S. data. Such outcome would support the single currency against the U.S. dollar due to increased positive sentiment.

The investors could take advantage of their own expectations of the EUR/USD exchange rate by opening a position in the CurrencyShares Euro Trust (NYSEARCA:FXE). This ETF tracks the price of the euro measured in U.S. dollars. The fund has an expense ratio of 0.40%. If investors expect the euro to appreciate, a long position in the fund could be used. It they expect a higher value for the USD, a short position in the ETF could be opened.

Investors who prefer to measure the value of the USD against a basket of currencies could refer to the PowerShares DB USD Bullish ETF (NYSEARCA:UUP) or the PowerShares DB USD Bearish ETF (NYSEARCA:UDN) in order to take advantage of their expectations. Both funds are U.S. dollar denominated and track the value of the USD against six other major currencies - euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The funds' expense ratio is 0.50%.

Monday, Nov. 26

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Gfk Consumer Confidence Survey (Dec.)

12:00

7:00am

6.2

6.3

USA Chicago FED National Activity Index (Oct.)

13:30

8:30am

0.18

0.0

USA Dallas FED Manufacturing Index (Nov.)

15:30

10:30am

2.0

1.8

Monday offers little quantity of economic data. The Chicago FED national activity index is expected to continue its growth from September. Such outcome would support the euro. The same is valid for the Dallas FED manufacturing index. Negative surprises on any of the indexes would weigh on the risk-on environment and support the USD.

Update as of 16:00 GMT: The data released today (Germany Gfk consumer confidence, Chicago FED national activity index and Dallas FED manufacturing index) show a deterioration in each indicator. The values significantly missed the estimates which might suggest there was an upward bias in the analysts' expectations. The consumer confidence's reading is 5.9 (against 6.2 est.), the national activity index marks a decrease to -0.56 and the manufacturing index show a decrease to -2.8 (expectations for both indexes were for increases). The EUR/USD exchange rate was virtually unchanged after the releases and continues to trade in the $1.2950- $1.2980 range.

Tuesday, Nov. 27

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Import Price Index

7:00

2:00am

1.7%

1.8%

USA Durable Goods Orders (Oct.)

13:30

8:30am

9.9%

USA Durable Goods excl. Transportation (Oct.)

13:30

8:30am

-0.6%

2.0%

USA S&P/Case-Shiller Home Price Index (Sept.)

14:00

9:00am

2.9%

2.0%

USA Housing Price Index (m-o-m) (Sept.)

15:00

10:00am

0.4%

0.2%

USA Consumer Confidence (Nov.)

15:00

10:00am

73.1

72.2

USA FED's Beige Book

19:00

2:00pm

Germany's import price index is expected to show a slight decline which would ease the inflationary pressure in the country. Such an outcome could be seen as negative for the euro because it would mean either the demand or the inflationary expectations in Germany are lower.

After the significant increase in the last report, the durable goods orders in the U.S. are expected to show a decline. Reasons for such a decline could be found in the uncertainty about the fiscal cliff as the businesses could not properly enough assess their tax burdens and costs. A positive surprise here would support the euro because of a renewed notion that the American economy is improving.

This positive sentiment could be further enhanced by the home price data and consumer confidence. Both house price indexes are expected to show higher values. The consumer confidence is also expected to rise.

A combination of positive readings with no negative surprises could significantly increase the risk-on sentiment of the market. As a result the euro should appreciate further, together with stocks and gold.

Negative surprises on the data would, as expected, weigh on the risk appetite and support a search for safety.

Wednesday, Nov. 28

Event

GMT Time

EST Time

Consensus

Previous

EU M3 Money Supply (Oct.)

9:00

4:00am

2.8%

2.7%

EU Private Loans (Y-o-Y) (Oct.)

9:00

4:00am

-0.8%

-0.8%

EU Germany CPI (Nov.)

13:00

8:00am

2.0%

USA New Homes Sales (Oct.)

15:00

10:00am

0.387M

0.389M

M3 money supply in Europe is expected to show a slight increase. This in general, would support higher inflationary expectations which is positive for the euro. The Germany CPI data could also contribute to such expectations, given a higher than the previous value is released.

Mr. Draghi, President of ECB, speaking on the European Banking Congress on Friday, November 23, said that the "The ECB's attachment to the primary objective of price stability remains unquestioned", according to RTT News. In the light of such a commitment any increase in the projected long term inflation would support the euro as the ECB should act to protect its primary goal.

The private loans in Europe are another important indicator because the availability of credit is a vital ingredient to a healthy economy. In the recent months, a tendency of tightening the credit conditions put a hold on business expansions, as suggested by Howard Archer, economist at Global Insight, cited by Reuters. A positive surprise here would support the euro and the risk-on environment.

The new homes sales in the U.S. are expected to show a slight decrease. A positive surprise would support the euro.

Thursday, Nov. 29

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Unemployment Rate s.a. (Nov.)

8:55

3:55am

6.9%

EU Business Climate (Nov.)

10:00

5:00am

-1.6

-1.62

EU Consumer Confidence (Nov.)

10:00

5:00am

-25.7

USA Core Personal Consumption Expenditures (Q3)

13:30

8:30am

1.8%

USA GDP Annualized (Q3)

13:00

8:30am

2.8%

2.0%

USA GDP Price Index (Q3)

13:00

8:30am

2.8%

2.9%

USA Initial Jobless Claims

13:00

8:30am

404K

410K

USA Pending Home Sales (m-o-m) (Oct.)

15:00

10:00am

0.9%

0.3%

Thursday presents a significant amount of data on both sides of the ocean. The day starts with the unemployment rate in Germany. The market expects that the unemployment increased in November but at a slower pace. Any result which deviates significantly from this expectation would drive the euro price in a direction contrary to the deviation.

The consensus on the business climate is for a slight slowdown of the pace of deterioration. Such a result could provide some support for the euro. The same is true for the consumer sentiment.

The GDP value in the U.S. is among the most important indicators in the current week. The market expects a rise to 2.8%, from the previous value of 2.0%. If this estimate is significantly missed, a fear about the U.S. growth prospects could affect the risk-on sentiment and cause a flow of money into safe haven currencies, like the USD, JPY, or CHF.

The U.S. CPE and the GDP price index are regarded as indicators of future inflation. A lower inflationary expectations would support the euro.

For the other two indicators, the initial jobless claims and pending home sales, the consensus is for an improvement. Any negative surprises here would cause the USD to appreciate.

Friday, Nov. 30

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Bundestag Vote on Greek Aid

N/A

N/A

EU Germany Retail Sales (Oct.)

7:00

2:00am

1.2%

-3.1%

EU CPI (Nov.)

10:00

5:00am

2.5%

2.5%

EU Unemployment Rate (Oct.)

10:00

5:00am

11.7%

11.6%

USA Core PCE - Price Index (Oct.)

13:00

8:00am

1.7%

USA Personal Income (m-o-m) (Nov.)

13:00

8:00am

0.2%

0.4%

USA Chicago PMI (Nov.)

14:45

9:45am

51.2

49.9

The event risk of Friday is connected with the Bundestag vote on the Greek aid. Although a political decision seems to be close, a surprising negative vote would present a significant weight on the euro and lead to its depreciation.

The consensus estimate on the Germany retail sales points to a rise. Such a rise would support a brighter view on the German economy, and consequently, it will support the euro.

The preliminary data on the European CPI is expected to show no change from the previous value. This could initially support the euro against the USD but then lead to a further pressure on the ECB to protect its price stability goal. The reason for this is that the lower U.S. dollar generally means higher commodities and energy prices. Higher energy prices would further increase the inflationary pressure in Europe - a situation the ECB would have to deal with.

Negative surprises concerning the U.S. Data, including a higher-than-previous value of core PCE price index, would put weight on the recovery expectations and reduce risk taking sentiment. As a result an increase of the demand for USD could be seen.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: EUR/USD: The Week Ahead