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Some of the risks mentioned in the previous edition of our "EUR/USD: The Week Ahead" review did materialize and the optimistic sentiment of the market participants was replaced by more cautious behavior. The euro lost about 2% for the week and finished around $1.337. As of time of writing, the single currency has reversed some of its losses and trades around $1.339.

Although last week's remarks by Mr. Draghi about the problems the strong euro might cause to European growth and exports did their job, the decline already started on Monday when the single currency lost almost a cent and a half against the U.S. dollar. A Bloomberg article suggests that Mr. Draghi's comments about the euro intensified market expectations that ECB might revise downward its inflation projections. This put further pressure on the euro because it means a rate cut on behalf of the ECB might follow sooner rather than later.

Technically, the euro continues to be under pressure for the days to come. An increase to the previous highs of $1.3440/60 is still possible. However, if that level proves to be a strong resistance, we could then see a further decline to $1.3300/10 where several Fibonacci levels are combined with previous tops (as of the middle of December and beginning of January). Still, as long as the single currency trades above its 50 days moving average (EMA50) and the positive moving averages crossover is in line, the longer term technical picture remains euro supportive.

The Week Ahead

The major event risks for the EUR/USD rate are again concentrated near the second half of the week. Those are the U.S. retail sales data on Wednesday, Germany and EU GDP data, as well as the ECB monthly report, released on Thursday. The market consensus does not point to a very strong data. If those happen to be true, this would benefit the U.S. dollar because of the lower amount of news in support of the "risk-on" sentiment.

The optimistic mood continues to prevail among the analysts but by a much lower margin. This is because of an increase of the optimistic expectations for the U.S. data (50%, up from 30% in the previous week) at the expense of more pessimistic consensus for Europe (56%, down from 75%). This generally favors the U.S. dollar as a safe haven currency.

The current value of the Consensus Optimism Index (COI) is 53, down from about 58 for the previous week.

The index shows the proportion that the positive consensus estimates take in all the estimates we have available 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 hedge the positions they have in other assets by taking advantage of their own expectations for the EUR/USD rate. For instance, American investors with investments in euro denominated assets who expect 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 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. Available option here would be the SPDR Gold Trust (NYSEARCA:GLD), 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 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 evaluated periodically 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, Feb. 11

Event

GMT Time

EST Time

Consensus

Previous

EU Eurogroup Meeting

N/A

N/A

Monday presents a little amount of economic events but the Eurogroup meeting could influence significantly the EUR/USD exchange rate. As a Bloomberg article mentions, the 17 ministers of the euro area will try to regain the momentum the single currency has lost during the last week. The event risk here is that a failure to deliver the stability measures the market expects from the meeting, most probably will increase the pressure on the euro and lead to its further depreciation.

Tuesday, Feb. 12

Event

GMT Time

EST Time

Consensus

Previous

USA NFIB Business Optimism Index (Jan.)

12:30

7:30am

88

USA Redbook Index (M-o-M) (Feb. 3)

13:55

8:55am

-0.6%

USA Monthly Budget Statement (Jan.)

19:00

2:00pm

-0.26B

On Tuesday we only have U.S. economic data. A higher-than-previous values of the NFIB small business index and the Redbook index will generally support the "risk-on" environment which is euro positive, and vice versa.

Wednesday, Feb. 13

Event

GMT Time

EST Time

Consensus

Previous

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

07:00

2:00am

2.2%

3.2%

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

10:00

5:00am

-2.3%

-3.7%

USA Import Price Index (M-o-M) (Jan.)

13:30

8:30am

0.5%

-0.1%

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

13:30

8:30am

0.3%

0.5%

USA Business Inventories (Dec.)

15:00

10:00am

0.3%

0.3%

USA 10y Note Auction

18:00

1:00pm

1.863%

A higher-than-expected values of the Germany wholesale price index and the EU industrial productions would support the single currency because of the better economic development they reveal.

The same could be said about the U.S. retail sales. Better values will support the "risk-on" environment which would benefit the euro.

If the U.S. import price index delivers a value which is in line or higher than the expected one, this could promote increased inflation expectations in the U.S. which will be U.S. dollar supportive. The 10y notes auction near the end of the day could also shed more light on the inflation expectations of the market participants as an increase of the yield could mean they are seeking higher real returns.

Thursday, Feb. 14

Event

GMT Time

EST Time

Consensus

Previous

EU Germany GDP s.a. (Q-o-Q) (Q4.)p.

07:00

2:00am

0.5%

0.2%

EU Germany GDP n.s.a. (Y-o-Y) (Q4)p.

07:00

2:00am

0.5%

0.4%

EU ECB Monthly Report

09:00

4:00am

EU GDP s.a. (Q-o-Q) (Q4)p.

10:00

5:00am

-0.4%

-0.1%

USA Initial Jobless Claims

13:30

8:30am

366K

USA 30y Bond Auction

18:00

1:00pm

3.07%

Thursday presents mostly GDP data, although a preliminary one. A failure to meet the expectations of higher-than-previous values for Germany GDP would put pressure on the euro.

On the other hand, a positive surprise on the EU GDP could support the single currency.

The ECB monthly report is an important event because it could reveal the real money flow inside the European financial system. It could also expand further on the remarks of Mr. Draghi from the last week about the inflation developments in Europe. This will affect the market participants' perception of whether a rate cut in Europe could be expected soon.

The 30y bond auction could be viewed as a mean to assess the institutional players sentiment. A lower yield could mean an increase in the fear and would be U.S. dollar supportive.

Friday, Feb. 15

Event

GMT Time

EST Time

Consensus

Previous

EU Trade Balance n.s.a. (Dec.)

10:00

5:00am

€12.5B

€13.7B

USA NY Empire Manufacturing Index (Feb.)

13:30

8:30am

-3.0

-7.78

USA Net Long-Term TIC Flows (Dec.)

14:00

9:00am

$52.3B

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

14:15

9:15am

0.3%

0.3%

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

14:55

9:55am

73.8

The consensus for the EU trade balance is that it will mark a lower surplus. If the data released shows an even stronger-than-expected decline, this would weigh on the euro because it would mean the higher euro from the last several months indeed put pressure on the European exports.

Higher-than-expected values of the Empire manufacturing index and the U.S. industrial production could support the euro as the currency in the EUR/USD pair which benefits from an increase of the "risk-on" sentiment.

Source: EUR/USD: The Week Ahead