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The first week of 2013 brought about 1.1% decline in the value of the euro against the U.S. dollar. The EUR/USD rate started the second week at $1.306 per euro. On Monday the single currency advanced to as high as $1.3127.

A recent Bloomberg article cites Credit Suisse Group AG analysts which "envisage a recovery" to at least $1.3309. Their analysis is based on the Fibonacci levels and particularly on the exchange rate staying above the 50% level of $1.2985. To calculate that level they used the range between $1.266 and $1.3308, values achieved on Nov. 13 and Dec. 19, respectively.

If we extend the range however to include the start of the current major euro appreciation, the longer term picture becomes somewhat different. The new range presented below, starts from $1.204 on July 24, 2012 and goes to $1.3309 on Dec. 19.


(Click to enlarge)

We see that euro touched the 23% Fibonacci level last week and rebounded. This could influence the exchange rate movement during the current week but in a longer term a decline to the 38% level (around $1.282) could follow. Moreover, a double top could be seen near the $1.33 level. The moving averages crossover is still euro positive however, so for now the major term picture remains euro positive.

Another warning sign concerning the euro appreciation in the near weeks, could be seen on the following graph.


(Click to enlarge)

We see a bearish divergence between the MACD indicator and the euro price, marked by the blue lines on the graph. Moreover MACD is currently negative. This divergence is not an imminent signal but could hint of some exhaustion in the euro bulls. Consequently, the following weeks should be watched with caution.

The Week Ahead

The current week faces several important economic events - the EU unemployment rate, quarterly EU GDP and the ECB interest rate decision. The market consensus is that generally there will be no change, with the exception of the unemployment which is expected to show a slightly higher value. The Consensus Optimism Index (COI) which we calculate, currently shows that the optimism prevails among the analysts. The index current value goes to 59% (against 42% for the first week of the year).

Consensus Optimism Index EURUSD

The index shows the proportion the positive consensus estimates take in all the estimates for the respective week. A value above 50% represents an optimistic mood in the expectations rather than pessimistic. The weekly change in index's value could be used as a tool to assess the analysts' mood. It should not be neglected however that the EUR/USD rate actually moves rather on the real data and on how that data differs from the expected one.

Investors could take advantage of their own expectations of the EUR/USD exchange rate by some of the available ETFs which track the mentioned exchange rate. The more focused option is the CurrencyShares Euro Trust (NYSEARCA:FXE). The ETF tracks only 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, they could open a short position in the ETF.

Those who prefer more diversified options could check the PowerShares DB USD Bullish ETF (NYSEARCA:UUP) and the PowerShares DB USD Bearish ETF (NYSEARCA:UDN). 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%.

As mentioned in our previous editions of this weekly currency review, investors could hedge some of their U.S. dollar exposure by using alternatives whose prices often move inversely to the price of the U.S. dollar. An available option here would be the SPDR Gold Trust (NYSEARCA:GLD). As of the end of December 2012, the monthly correlation for the last one year between GLD and UUP stands at -0.75. This is a decrease since the November value of -0.77. The negative correlation suggests that those expecting the U.S. dollar to decline in a near- to long-term horizon could use a long position in the ETF, and vice versa. GLD tracks the spot price of gold and holds physical gold bullion. It has an expense ratio of .40%.

Because the correlation is a dynamic characteristic, it should be periodically evaluated to see what the current value is. Any lowering of the correlation would suggest a further assessment of the effectiveness of the hedge on behalf of investors.

Monday, Jan. 7

Event

GMT Time

EST Time

Consensus

Previous

EU Sentix Investor Confidence (Jan.)

9:30

4:30am

-15

-16.8

EU Producer Price Index (y-o-y) (Nov.)

10:00

5:00am

2.4%

2.6%

The week starts with Sentix investor confidence index in Europe. Market expects a slight improvement of the indicator in January. The more important data for the day is the European PPI where the consensus is for a slight decline. Market expectations on both indicators reveal a more positive than negative analysts' mood concerning the European economic development.

Update as of 20:00GMT: The Sentix investor confidence rose to a value of -7.0 which is significantly higher than the consensus estimate. This shows a rising optimism in European investors and is supportive for the euro.

The PPI shows a lower-than-expected rise to a value of 2.1% (down from 2.6% in the previous reading). This generally would support the USD against the euro but on a longer term could present a subdued inflationary pressure on the European economy. This is euro supportive at the moment as it could make the ECB more susceptible to decreasing its interest rate later in the week.

Tuesday, Jan. 8

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Trade Balance (Nov.)

7:00

2:00am

€15.0B

€15.2B

EU Consumer Confidence (Dec.)

10:00

5:00am

-26.9

EU Business Climate (Dec.)

10:00

5:00am

-1.10

-1.19

EU Retail Sales (y-o-y) (Nov.)

10:00

5:00am

-2.7%

-3.6%

EU Unemployment Rate (Nov.)

10:00

5:00am

11.8%

11.7%

USA NFIB Business Optimism Index (Dec.)

12:30

7:30am

87.5

USA Redbook Index

13:55

8:55am

2.9%

The market expects that Germany's trade balance would continue to post a surplus, although the expected value is a bit lower than the previous one. A significantly negative value here would weigh on the euro because of renewed worries that the strongest economy in the eurozone might slow down.

Positive surprises on the other European indicators would support the single currency against the U.S. dollar.

Higher-than-previous readings of the U.S. small business optimism index and Redbook index would also support the "risk on" environment. This would weigh on the USD as a safe haven currency.

Wednesday, Jan. 9

Event

GMT Time

EST Time

Consensus

Previous

EU GDP (q-o-q) (Q4)

10:00

5:00am

-0.1%

-0.1%

EU Germany Industrial Production (m-o-m) (Nov.)

11:00

6:00am

1%

-2.6%

USA 10Y Notes Auction

18:00

1:00pm

1.652%

The quarterly change of the European GDP is expected to remain the same. A positive surprise here would support the euro at least because it would make a further decrease of the ECB's interest rate more improbable.

The market expects that the German industrial production would post an increase on a monthly basis. This would support the euro but a negative surprise would benefit the USD as the risk-off currency in the EUR/USD pair.

The result of the 10Y auction would show if a change in the demand for U.S. Treasuries is taking place. A higher value here could weigh on the USD as it would mean the bond investors are preferring other asset classes, maybe in a search for a higher yield.

Thursday, Jan. 10

Event

GMT Time

EST Time

Consensus

Previous

EU ECB Interest Rate Decision

12:45

7:45am

0.75%

0.75%

EU ECB Monetary Policy Statement and Press Conference

13:30

8:30am

USA Initial Jobless Claims

13:30

8:30am

365K

372K

USA 30Y Bond Auction

18:00

1:00pm

2.917%

The ECB rate decision and the ECB policy statement on Thursday represent the culmination of economic data from Europe for the current week. They also present the biggest event risk in the week. The market consensus is that there would be no change in the interest rate. Thus a lower interest rate could initially weigh heavily on the single currency. Such an outcome still seems not so probable, according to a Bloomberg article from Monday. It suggests that ECB would have to start to support growth in the eurozone but not necessarily by an interest rate cut. In a previous edition of our "EUR/USD: week ahead" review we cited Mr. Draghi, President of ECB, who said that "The ECB's attachment to the primary objective of price stability remains unquestioned". As the week goes on the chances for a rate cut might increase however, given the inflationary pressure on the European economy lightens or the growth significantly declines.

Friday, Jan. 11

Event

GMT Time

EST Time

Consensus

Previous

USA Trade Balance (Nov.)

13:30

8:30am

$-42.24B

USA Import Price Index (y-o-y) (Dec.)

13:30

8:30am

-1.6%

USA Monthly Budget Statement (Dec.)

19:00

2:00pm

$-171.11B

Friday presents only U.S. economic data. Better-than-previous values would support the notion that the American economy is on the right track. This would increase the risk seeking, thus it would support the single currency against the U.S. dollar.

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