EUR/USD: The Week Ahead

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 |  Includes: FXE, UDN, UUP
by: Vision Capital M.

During the previous week, the euro lost more than 2% against the USD. It finished at $1.302 after going to as high as $1.3310/20 on Wednesday. As of time of writing the single currency trades around the $1.30 level.

According to a Bloomberg article, FED's Fisher said on Wednesday last week that FED should "scale back $85 billion in monthly bond buying, warning against channeling too much stimulus into a housing market that's already rebounding". This marked the two days of euro selling which drove its price to levels not seen since December 2012.

Later during the week the remarks of Mr. Bernanke, cited on Bloomberg, stated that

"Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading -- ironically enough -- to an even longer period of low long-term rates," Bernanke said yesterday in a speech in San Francisco. "Only a strong economy can deliver persistently high real returns to savers and investors."

This supported the notion that there will be no imminent decline of the monetary stimulus for the U.S. economy. What could weigh on the American economy at the moment however, are the automatic spending cuts that started on March 1. As Mr. Bernanke put it earlier in the week, "this additional near- term burden on the recovery is significant."

The Week Ahead

The most important risk events of the week are the ECB's rate decision and the central bank's monetary policy press conference, both on Thursday. Those have the potential to determine the near- to long-term direction of the EUR/USD exchange rate. The preliminary value of EU GDP released on Wednesday, is also important because it will enhance the economic development picture of Europe.

Speaking technically, the euro broke some important support levels around the $1.3060/70 area. Those were the 38.2 Fibonacci retracement level of the whole upward movement from July 2012 to February 2013 and 61.8 Fibonacci retracement of the November 2012 to February 2013 increase. If the current $1.2990/30 area does not hold, a decline to the $1.29 area where the 200SMA lies, is still possible.

After the last week's contradicting signals from officials on both side of the ocean, this week's analysts expectations are significantly pessimistic, with only 35% of the expectations being for better-than-previous values. Consensuses are more optimistic for the U.S data (36%) than for the European one (33%). The weekly decline in optimism is bigger for the European data. This generally would favor the U.S. dollar against the euro.

The significant negative expectations increase the probability for positive surprises. Given that such were to happen, they would generally favor the euro because of the current increased negative market sentiment towards the single currency.

The current value of our Consensus Optimism Index (COI) is 35, down from 51.5 for the previous week.

The index shows the proportion 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 take advantage of their own expectations about the EUR/USD exchange rate movement in order to hedge the positions they have in other assets. 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%.

For those who prefer more diversified funds, among the options are 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%.

Monday, March 04

Event

GMT Time

EST Time

Consensus

Previous

EU Eurogroup Meeting

N/A

N/A

EU Sentix Investor Confidence (March)

09:30

4:30am

-5.2

-3.9

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

10:00

5:00am

1.9%

2.1%

USA ISM New York Index (Feb.)

14:45

9:45am

56.7

Click to enlarge

After 6 consecutive increases in the Sentix investor confidence index since last August, the analysts this time expect a decline. Any positive surprise here would be euro supportive.

The PPI index might serve as an indicator of inflationary expectations in the eurozone. While the consensus for year-over-year data is for a decline, the monthly change expectations point to an increase. Given that such an increase happens, it could limit the ECB's willingness to lower its main refinancing rate later in the week. Any higher-than-expected value here would support the single currency.

Positive data from ISM New York index would also support the euro against the USD.

Tuesday, March 05

Event

GMT Time

EST Time

Consensus

Previous

EU Markit PMI Composite (Feb.)

8:58

3:58am

47.3

48.6

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

10:00

5:00am

-2.9%

-3.4%

USA ISM Non-manufacturing PMI (Feb.)

15:00

10:00am

55.0

55.2

Click to enlarge

A positive surprise on the Markit PMI Composite could drive the euro higher because it will show an increased optimism between the European business.

The EU retail sales are among the few indicators this week for which analysts expect a better value. Negative surprise here would put pressure on the euro.

On the contrary, a positive surprise in the ISM non-manufacturing index value would support the euro because of an increase in the risk-on environment.

Wednesday, March 06

Event

GMT Time

EST Time

Consensus

Previous

EU GDP (Q4) (Q-o-Q)p

10:00

5:00am

-0.6%

-0.1%

USA ADP Employment Changes (Feb.)

13:15

8:15am

173K

192K

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

15:00

10:00am

-2.0%

-1.8%

Click to enlarge

The preliminary value of EU GDP is among the most important data during the current week. Consensus is for a continuation of the decline witnessed since August 2012. A positive surprise here would be strongly euro supportive.

The ADP employment change is important because it hints the conditions in the U.S. labor market. It also serves as an indicator for future consumption. Higher-than-expected value here or in the factory orders would increase optimism and support the euro.

Thursday, March 07

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Factory Orders (M-o-M) (Jan.)

11:00

6:00am

0.5%

0.8%

USA Challenger Job Cuts (Y-o-Y) (Feb.)

12:30

7:30am

40.4

EU ECB Rate Decision

12:45

7:45am

0.75%

0.75%

EU Press Conference

13:30

8:30am

USA Nonfarm Productivity (Q4)

13:30

8:30am

-1.6%

3.2%

USA Initial Jobless Claims

13:30

8:30am

356K

344K

USA Consumer Credit Change (Q4)

20:00

15:00am

$14.25B

$14.59B

Click to enlarge

The most important risk event of the week comes in Thursday. ECB's rate decision could influence the EUR/USD exchange rate in near to long-term horizon. The remarks which Mr. Draghi made on the ECB's press conference on the bank's monetary policy last month, stated that:

"The exchange rate is not a policy target, but it is important for growth and price stability."

It marked the beginning of the last month's euro decline against the USD which continued during most of February. Last week's inflation data from Europe showed a decrease in inflationary pressures, with CPI preliminary value for February declining to 1.8% (from 2.0%). This lifts up the pressure from the ECB to keep the rates unchanged in order to not induce further inflation.

On the other hand, the EUR/USD rate has already declined by 4% in February, the single biggest monthly decline since May 2012, which for the moment might be suitable enough for inducing growth in the EU without further monetary easing through a lower interest rate.

Having said all this, we believe a change in the rate this week is rather improbable than not. A no-change in the rate will be euro supportive and might lead to appreciation of the single currency against the USD.

The consensuses for all the U.S. data in Thursday are for worse-than-previous values. Any surprises here would support the optimism and thus might lead to euro appreciation.

Friday, March 08

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Industrial production (M-o-M) (Jan.)

11:00

6:00am

0.6%

0.3%

USA Average Hourly Earnings (M-o-M) (Feb.)

13:30

8:30am

0.2%

0.2%

USA Nonfarm Payrolls (Feb.)

13:30

8:30am

160K

157K

USA Unemployment Rate (Feb.)

13:30

8:30am

7.9%

7.9%

Click to enlarge

Germany industrial production is among the few indicators this week with positive expectations. Germany is among the leading economy of the eurozone, hence an increase in this indicator would support the euro. A negative surprise would further weigh on the value of the single currency.

The expectations for last three indicators are for no changes or lower-than-previous values. Any positive surprises here would increase the risk-on sentiment. Thus, such surprises could support the euro.

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.