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During the second week of 2013 the euro marked its biggest increase in a single day for the last 3 months. After going initially to as low as $1.304 on Wednesday, the ECB rate decision and the consecutive press conference on the ECB monetary policy caused the single currency to gain more than $0.02 (1.7%) Thursday. It finished the week at $1.3336 on Friday with a 2% weekly gain.

In his introductory remarks at the ECB press conference, Mr. Draghi, President of ECB, said:

"The economic weakness in the euro area is expected to extend into 2013. In particular, necessary balance sheet adjustments in financial and non- financial sectors and persistent uncertainty will continue to weigh on economic activity. Later in 2013 economic activity should gradually recover … as our accommodative monetary policy stance, the significant improvement in financial market confidence and reduced fragmentation work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth."

According to a Bloomberg article, this was enough for the markets to lower the yields on Spanish bonds and increase the German yields because the search for safety have been lowered.

There are however, several conditions in Mr. Draghi's forecast which should be met in order for the "gradual recovery" to start later in 2013. Those are the stability of the financial markets, increase in the private domestic consumption and stronger foreign demand. Most of them do not depend only on European authorities actions.

Moreover, Mr. Draghi's remarks imply that at least in the first months of 2013 we could continue to see a worsening (or stabilization) of some economic indicators but not a significant improvement. If such negative surprises of economic data concerning the expectations happen on a wide scale, they could hamper the optimism of some market participants and cause a depreciation of the euro in the near term. Consequently, the first quarter of 2013 should be watched with caution by the euro bulls as there might be an increase of the downside risk.

The Week Ahead

The current week faces several important economic events - the Germany GDP growth, EU CPI, U.S. CPI and the ECB monthly report. The market consensus is that there will be no change, with the exception of Germany GDP, which is expected to show a decline. The Consensus Optimism Index (COI), which we calculate, shows that the current value of optimism is lower than a weak ago but analysts still continue to be more optimistic than not in their expectations. The index current value declines to 57% (against 60% for the last week).

The index is constructed so that it 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 the 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 use their own expectations of the EUR/USD exchange rate movement to hedge the positions they have in other assets. An American investor with investmentsin euro denominated assets who expects that the U.S. dollar would appreciate against the single currency, could try to decrease the currency risk by selling euros or by opening a short position in an ETF which tracks the price of the euro. CurrencyShares Euro Trust (NYSEARCA:FXE) is an option here. It tracks only the price of the euro measured in U.S. dollars. This ETF has an expense ratio of 0.40%.

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 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 marks a decrease since the November value of -0.77. The negative correlation suggests 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 the investors.

Monday, Jan. 14

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Wholesale Price Index (Y-o-Y) (Dec.)

07:00

02:00am

3.3%

3.2%

EU Industrial Production (Y-o-Y) (Nov.)

10:00

5:00am

-3.2%

-3.6%

USA FED Bernanke Speech

21:00

5:00pm

The week starts with the Germany wholesale price index, where a slight improvement is expected. The market also expects an improvement of industrial production in Europe.

The big event risk for the day comes from the speech of Mr. Ben Bernanke, Fed Chairman, in the evening. Last week's volatility during and after the ECB monetary policy conference could hardly be repeated but the speech might reveal more details about the current Fed policy concerning its dual mandate. A hint about a more restrictive monetary policy might give strong support to the U.S. dollar.

Update as of 18:00GMT: The value of the wholesale index in Germany (3.2%) came almost in line with expectations. However, the industrial production in Europe showed a decline to -3.7%. These negative surprises naturally caused a decline of the euro against the USD but later in the day the single currency recovered. It currently trades close to $1.337.

Tuesday, Jan. 15

Event

GMT Time

EST Time

Consensus

Previous

EU Germany CPI (Y-o-Y) (Dec.)

7:00

2:00am

2.1%

1.9%

EU Germany GDP Growth

8:00

3:00am

0.8%

3%

EU Trade Balance (Nov.)

10:00

5:00am

€10.0B

€10.2B

USA PPI (Y-o-Y) (Dec.)

13:30

8:30am

1.4%

1.5%

USA Retail Sales (M-o-M) (Dec.)

13:30

8:30am

0.2%

0.3%

The Germany data on Tuesday would show if the strongest economy in Europe is about to face some hard times in its economic development during the weeks ahead. Market expects an increase in Germany's consumer price index (a measure of inflation) but in the light of last week's lower values of exports and factory orders (s.a. basis) a higher inflation could hurt consumers. This would affect the country's growth and weigh on the euro.

Any positive surprises on the U.S. data could balance the negative values from Europe and as a result, to increase the "risk on" sentiment. This would support the euro against the USD.

Wednesday, Jan. 16

Event

GMT Time

EST Time

Consensus

Previous

EU CPI Core (Y-o-Y) (Dec.)

10:00

5:00am

1.4%

EU CPI (Y-o-Y) (Dec.)

10:00

5:00am

2.2%

2.2%

USA CPI (Y-o-Y) (Dec.)

13:30

8:30am

1.8%

1.8%

USA CPI Ex. Food & Energy (Y-o-Y) (Dec.)

13:30

8:30am

1.9%

1.9%

USA Net Long Term TIC Flows (Nov.)

14:00

9:00am

$1.3B

USA Industrial Production (M-o-M) (Dec.)

14:15

9:15am

0.3%

1.1%

USA FED's Beige Book

19:00

2:00pm

Wednesday is another inflation data day. The expectations are that there will be no change since the previous values, both in Europe and the U.S. Higher-than-expected inflation values could increase the caution of investors and weigh on the "risk on" environment. This would support the U.S. dollar which is regarded as a safe haven currency in times of caution.

A decrease in the net long term TIC flows would show the international investors might be changing their long term demand for U.S. treasuries. This could weigh on the USD as it would mean investors are preferring other asset classes, maybe because they perceive smaller long term risk for their capital.

A positive surprise on the U.S. industrial production would be euro supportive because of an increase of the risk taking sentiment.

Thursday, Jan. 17

Event

GMT Time

EST Time

Consensus

Previous

EU ECB Monthly Report

09:00

2:00am

EU Germany 10Y Bond Auction

13:30

8:30am

1.4%

USA Initial Jobless Claims

13:30

8:30am

371K

USA Housing Starts (Dec.)

13:30

8:30am

0.861M

USA Philadelphia FED Manufacturing Survey

15:00

10:00am

8.1

The ECB monthly report is expected with interest as it would show the numbers behind the words of Mr. Draghi, president of ECB, from last week. Markets would be able to assess whether a rate cut could be expected during the next meetings of the ECB.

German bonds have been among the safe haven destinations during recent years. An increase in the yield would signal a change in investors' preferences. Such a change could be explained by the ECB's monetary policy. Another explanation however, might include a change in the near term perspectives the bond investors see before the German economy. Given the latter happens to be true, it would weigh on the euro.

The data from the U.S. would show whether the current economic improvement is strong enough. Positive surprises would support the optimistic mood and support the single currency against the USD.

Friday, Jan. 18

Event

GMT Time

EST Time

Consensus

Previous

USA Reuters/Michigan Consumer Sentiment Index (Jan.)p

14:55

9:55am

72.9

A better-than-previous value of the preliminary value of Reuters/Michigan Consumer Sentiment index would support the notion that the American economy is on the right track. This would increase the risk seeking. Thus, it would support the euro 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