Weekly EUR/USD Outlook: How The Bullish And Bearish Forces Align

Includes: FXE, UUP
by: Cliff Wachtel

Here's a quick rundown of headwinds and tailwinds for the EURUSD

1. EU Political Turmoil: Bearish

The corruption scandal in Spain and resurgence of anti-market PM candidate Berlusconi should continue to create uncertainty with a distinctly bearish effect, for reasons we discussed in earlier posts here, here, and here.

Until these are settled the uncertainty will pressure the pair. Keep an eye on related headlines, but especially on the bond yields of both nations. Steady of falling yields suggest steady or rising confidence in their creditworthiness, while rising yields suggest the opposite. Last week yields rose for both nations and are likely to continue to do so as long as political evens suggest these nations' economic troubles will continue or worsen.

2. US Politics: Bearish

The coming sequestration battle is where many expect the Republicans to push for spending cuts, at least for a while. That could result in layoffs for tens of thousands of government employees, and limit their spending, as well as the spending of those who sell to them. That uncertainty, combined with the recent payroll tax cut expiration means wage earners are now taking home less money than they were a few months ago.

While that likely drop in consumer spending more directly effects the US than Europe, it is clearly a risk-off, bearish phenomenon, and so is likely to hurt this pair, which is a risk asset.

See here for further details.

3. Economic Calendar And Data: Probably Bearish - But Will That Matter?

Except for China and Germany, most of the largest economies continue to contract, as in the EU, or struggle to hit modest growth (US). In fact, US Q4 GDP for 2012 put total 2012 GDP growth below at 1.5%. Per Bloomberg's Rick Yamarone (via Art Cashin here):

The year-over-year change in real GDP was 1.5 percent. There has never been a time since measurement commenced in 1948 when the annual pace of real GDP has fallen that low without the economy ultimately slipping into recession. Sub-2.0 percent readings are historically the warning signal.

While historical patterns aren't guaranteed to repeat, it's hard to bet against that kind of track record.

Is there any compelling reason to say things could be different this time?

4. Ongoing Dovish Trend Among Top Central Banks: Bullish

As asked said in our summary of all 2013 forecasts here and here, how much do you believe the historically unprecedented global stimulus will make a difference, at least for asset prices?

Of course, you can argue that 2012's limp GDP came after over 2 years of steady stimulus, so while that may help asset prices, it's clearly not turning things around.

5. Technical Picture: Bullish Momentum Vs. Bearish Resistance

On the one hand, risk assets in general, and the EURUSD in specific, have strong, entrenched upward momentum. Even last week's pullback did not change that yet. However, after having decisively breached strong resistance at the 200 week EMA the pair has now returned to that level, which now serves as support. If the pair closes the coming weeks below that level, the rally would indeed be in doubt because the 200 week EMA would again be viewed as a strong resistance level that bent but did not break.

See here for charts and further details on the full technical picture for the pair, including a look at the divergence with the S&P 500, and what the decade high level S&P 500 chart tells us about the prospects for risk assets like the EURUSD

Hint: Would you bet that risk assets have much more room to move higher? Look what happened the last two times the S&P 500 (as good a single picture of support and resistance for risk assets as any) reached these lofty levels?


Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

01 feb 10 0052

Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.