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During the last week, the euro advanced with more than 1.4% against the U.S. dollar and finished at a price of $1.3655. As a Bloomberg article points out, behind this might be the combination of a contracting balance sheet of the ECB and the willingness of the FED to continue buying 85 billion of debt securities each month until "the outlook for the labor market does not improve substantially". The single currency started the current week with a decline to $1.36, as of time of writing.

Although the "euro crisis is not over," as the German Finance Minister Wolfgang Schaeuble said on Feb. 1, cited by Bloomberg, the euro continues to act like it is. Part of the reasons for this could be grounded in the optimistic market mood which reflects the positive economic development we witnessed till now, both in Europe and the U.S. The recent U.S. consumer confidence and the preliminary Q4 GDP data however, showed significant declines. If those are followed by not-so-bright data from Europe or the rest of the world, the current optimism could easily be replaced by a more cautious behavior which will weigh on the single currency.

Investors might be better prepared for any possible change in the EUR/USD major direction by recalling the words of Mr. Draghi, President of ECB, at the ECB press conference in the beginning of 2013:

"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."

Still, as long as the single currency trades above its 50 days moving average (MA50) and the positive moving averages crossover is in line, the longer term technical picture remains euro supportive.

The Week Ahead

The current week is relatively calm concerning the economic data. The major event risks the EUR/USD rate faces are connected with the ECB rate decision and ECB press conference on Thursday. The market consensus is that there will be no change in the rate. A surprising decline here would strongly affect the euro as it will lower the interest rate differential which currently supports the single currency.

Generally the optimistic mood still prevails among the analysts, as 60% of all the expectations are for better values. The percentage is lower for the U.S. data (33%) which generally favors the euro as a receiver of more positive expectations.

The current value of the Consensus Optimism Index (COI) is 60, up from about 46 in the previous 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 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 for the EUR/USD rate to hedge the positions they have in other assets. An option for an American investor with investments in euro denominated assets who expects that the U.S. dollar would appreciate against the single currency, is to 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 among the most widespread options 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 funds 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%.

In some of the previous editions of this weekly currency review an alternative hedge for U.S. dollar exposure was mentioned, namely the use of assets 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) which is an ETF that holds physical gold bullion and is designed to track the spot price of gold. It has an expense ratio of 0.40%. As of the end of January 2013, the monthly correlation for the last one year between GLD and UUP stands at -0.67. This marks a continuing decrease since the November (-0.77) and December (-0.75). We should note that the lower negative correlation lowers the effectiveness of the hedge. The negative correlation still 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.

As the recent development shows, the correlation is a dynamic characteristic and 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, Feb. 04

Event

GMT Time

EST Time

Consensus

Previous

EU Sentix Investor Confidence (Feb.)

09:30

4:30am

-3.6

-7.0

EU Producer Price Index (Y-o-Y) (Dec.)

10:00

5:00am

2.2%

2.1%

USA Factory Orders (M-o-M) (Dec.)

15:00

10:00am

1%

0%

Market consensus on Monday for the European data is that both indicators will mark increases. The expectations for the factory orders in the U.S. are also positive. Given that no negative surprises happen, this should support the single currency because of the improvement in the economic conditions seen on both sides of the ocean.

Tuesday, Feb. 05

Event

GMT Time

EST Time

Consensus

Previous

EU Markit PMI Composite (Jan.)

08:58

3:58am

48.2

47.2

EU Retail Sales (Y-o-Y) (Dec.)

10:00

5:00am

-1.1%

-2.6%

USA ISM Non-Manufacturing PMI (Jan.)

15:00

10:00am

55.8

56.1

On Tuesday the analysts expect that the European indicators will show a slight improvement. Any negative surprise here would put pressure on the euro.

After three consecutive increases in the value of ISM Non-manufacturing index (from 54.2 to 56.1), the analysts expect a slight decline to follow. A positive surprise here would support the risk-on environment. This has the potential to cause another appreciation of the euro against the USD.

Wednesday, Feb. 06

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Factory Orders (Y-o-Y) (Dec.)

11:00

6:00am

-1.0%

Wednesday does not present a lot of economic data. A higher-than-previous value of the factory orders in Germany would support the single currency.

Thursday, Feb. 07

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Industrial Production (Y-o-Y) (Dec.)

11:00

6:00am

-2.9%

EU ECB Interest Rate Decision

12:45

7:45am

0.75%

0.75%

EU ECB Monetary Policy Statement, Press Conference

13:30

8:30am

USA Initial Jobless Claims

13:30

8:30am

368K

USA Unit Labor Costs (Q4)p

13:30

8:30am

1.9%

-1.9%

EU European Council Meeting

15:00

10:00am

USA Consumer Credit Change (Dec.)

20:00

3:00pm

$13.40B

$16.05B

Thursday presents the most important economic data for the week, starting with the Germany industrial production. A positive value here would support the euro against the USD because of the portion the industrial sector takes in Germany's growth.

Perhaps the most important economic event for the day and the week, is the ECB rate decision. With the recent decrease of the M3 money supply in the European union and the lower-than-previous preliminary values of inflation in Germany and the EU, there is no imminent pressure on the ECB to raise its main refinancing interest rate. A surprising cut of the interest rate would initially weigh on the euro because of a change in the interest rate differential. However, in a longer term it could support the single currency because a lower interest rate would be growth supportive.

Of no lesser importance is the ECB press conference, as it could reveal further details on the future monetary policy the European central bank will follow.

The U.S. data would show whether the current economic improvement is continuing. A positive surprise in the unit labor costs would add to the inflationary expectations in the U.S. This will be USD supportive. A positive surprise concerning the expected decline in the consumer credit change however, would increase the optimistic mood of the markets because the higher credit value can potentially increase the consumer spending, hence to positively affect growth.

Friday, Feb. 08

Event

GMT Time

EST Time

Consensus

Previous

EU European Council Meeting

15:00

10:00am

EU Germany Harmonized Index of Consumer Prices (M-o-M) (Jan.)

07:00

2:00am

0.9%

EU Germany Trade Balance (Dec.)

07:00

2:00am

€14.8B

€14.6B

USA Trade Balance (Dec.)

13:30

8:30am

$-45.80B

$-48.73B

USA Wholesale Inventories (Dec.)

15:00

10:00am

0.4%

0.6%

Because the ECB rate decision will be known, the Germany inflation data released on Friday could have a limited effect on the single currency. A significantly higher than the preliminary value (-0.7%) however, could increase the inflationary expectations for the EU and support the growth optimism, at least for Germany. This will generally have a positive effect on the euro.

Source: EUR/USD: The Week Ahead