EUR/USD: The Week Ahead

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

The euro started the previous week with a sharp decline to the $1.2830 area. Among the reasons for this were expectations in the market participants that the model of dealing with troubled banks in Europe by providing them with almost infinite liquidity has changed. This notion has not left the currency market during the whole week. The single currency traded around the $1.28 level on Friday, after going down to as low as $1.2750 at some point. For the week, it lost about 1.3% of its price in USD.

In a long term view, a restructuring model in which the risks are taken back by the troubled banks and not by the European taxpayers is a sound model. It could, however, increase volatility at some point, even only because the markets got used to having a savior of last resort in the face of ECB.

As of the time of this writing, the euro trades around the $1.2810/20 level.

The Week Ahead

The most important risk events of the week are the and EU unemployment rate (Tuesday), the preliminary data on inflation in Europe (Wednesday), the ECB interests rate decision and the press conference (Thursday), and the U.S. unemployment and nonfarm payrolls (Friday). Those have the potential to determine the near- to long-term direction of the EUR/USD exchange rate.

This week's analyst expectations continue the pessimistic mood from the previous week, although at a slower pace. Only about 30% of the expectations are for better-than-previous values, compared to 24% for the previous week. Consensuses are again more optimistic for the U.S data (44%) than for the European one (18%).

Similar to the previous week, the overly pessimistic mood among the analysts leaves some room for positive surprises which, if they happen, would support the single currency as the beneficiary of the risk-on sentiment.

The current value of our Consensus Optimism Index (COI) is 30, up from about 24 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 data.

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, April 1

Event

GMT Time

EST Time

Consensus

Previous

USA Construction Spending (M-o-M) (Feb)

14:00

9:00am

1.0%

-2.1%

USA ISM Manufacturing PMI (Mar.)

14:00

9:00am

54.1

54.2

USA ISM Prices Paid (Mar.)

14:00

9:00am

59.8

61.5

Click to enlarge

Monday presents mostly U.S. economic data. The construction spending is expected to show an increase which would generally support the risk-on environment and the euro.

The consensuses for the other two indicators are that they will post declines. Positive surprises there would also support the euro.

Tuesday, April 2

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Markit Manufacturing PMI (Mar.)

7:53

2:53am

48.9

50.3

EU Unemployment Rate (Feb.)

9:00

4:00am

12%

11.9%

EU Germany Consumer Price Index (Mar.)p

12:00

7:00am

1.5%

1.5%

EU Germany Harmonized Index of Consumer Prices (Mar.)p

12:00

7:00am

1.6%

1.8%

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

14:00

9:00am

2.9%

-2.0%

Click to enlarge

The EU unemployment data is the event risk of the day because a surprise here could significantly influence the single currency value. A value below the consensus expectation or the previous one would support the single currency while a higher unemployment would weigh on the euro.

The preliminary data on Germany inflation is also important. Higher than expected values could support the euro to some extent although a higher inflation could pose some threats in front of the economic development.

Wednesday, April 3

Event

GMT Time

EST Time

Consensus

Previous

EU Consumer Price Index (Mar.)p

09:00

4:00am

1.7%

1.8%

USA ADP Employment Change (Mar.)

13:15

8:15am

200K

198K

USA ISM Non-manufacturing PMI (Mar.)

14:00

9:00am

55.8

56.0

Click to enlarge

The EU inflation data on Wednesday is expected to show a decline compared to the previous value. A surprise on the upside here could put some pressure on the ECB and its rate policy which in turn, could cause volatility in the EUR/USD pair.

Negative surprises on the U.S. indicators could weigh on the euro.

Thursday, April 4

Event

GMT Time

EST Time

Consensus

Previous

EU Markit PMI Composite (Mar.)

07:58

2:58am

46.5

47.9

EU Producer Price Index (Feb.)

09:00

4:00am

1.4%

1.9%

EU ECB Interest Rate Decision

11:45

6:45am

0.75%

0.75%

EU ECB Monetary Statement and Press Conference

12:30

7:30am

USA Initial Jobless Claims

12:30

7:30am

340K

336K

Click to enlarge

The most interesting data on Thursday would come from the ECB. According to the market consensus, the bank will not change its main interest rate. With the inflation data from Europe under the 2% threshold, the bank has no imminent need to raise the rate. Hence, currently a decline indeed seems to be a more probable event than an increase. With the recent Cyprus tense situation and the effect it had on the single currency however, it seems more improbable that the ECB would risk a further depreciation of the euro by cutting its rate now. Nevertheless, a surprising cut would initially increase the pressure on the single currency.

Friday, April 5

Event

GMT Time

EST Time

Consensus

Previous

EU Retail Sales (Feb.)

09:00

4:00am

-1.8%

-1.3%

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

10:00

5:00am

1.2%

-1.9%

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

12:30

7:30am

0.2%

0.2%

USA Nonfarm Payrolls (Mar.)

12:30

7:30am

200K

236K

USA Unemployment Rate (Mar.)

12:30

7:30am

7.7%

7.7%

Click to enlarge

Friday presents some interesting data, too. The EU retail sales are expected to post a further decline. A positive surprise here would be euro supportive. The same, regarding the surprise, is valid for Germany factory orders.

The U.S. unemployment data is expected to stay the same as the previous value, at 7.7%. The nonfarm payrolls which are expected to show a 15% decline in their change compared to the previous value, could influence negatively the risk-on environment. This would support the USD against 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. I am long EURO.