During the last week the euro tried to break out of its recent range. It reached a value as high as $1.3242 (there lies the 50% Fibonacci retracement area of the whole decline from $1.37 to $1.274) on Wednesday but declined significantly on Thursday to $1.3040/60, with the ECB's rate decision and press conference. The single currency finished the week close to the $1.3110/20 area, marking an increase of 0.66% for the week.
Technically speaking, the uncertainty continues to prevail as there is no clear confirmation of a trend.
The Week Ahead
The current week has a little amount of economic data. The most important risk events of the week are the EU retail sales and the speech of Mr. Draghi (Monday), the U.S. unemployment data (Thursday), the speech of Mr. Bernanke (Friday). Those have the potential to present an increased volatility in the EUR/USD exchange rate.
This week's analysts' expectations reverse the pessimistic mood from the previous week. Almost 53% of the expectations are for better-than-previous values, which is about double the number of the previous week optimistic expectations. Consensuses are again more optimistic for the U.S. data (83%) than for the European one (38%). The growth of the U.S. optimistic expectations is almost double the one of the European optimistic consensuses (160% vs. 90%).
The current value of our Consensus Optimism Index (COI) is 52, up from about 27 for the previous week, and is close to the middle of the range. Hence, the probability of negative of positive surprises does not seem to be elevated.
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, May 6
EU Germany Markit Services PMI (Apr.)
EU PMI Composite (Apr.)
EU Retail Sales (Y-o-Y) (Mar.)
EU ECB President Draghi Speech
Monday presents the biggest amount of economic data for the week. Generally, the consensuses are for a slightly worse-than-previous data. This could put weigh on the single currency because of a reduced risk-on sentiment of the market participants.
Update as of GMT 16:00: The European retail sales came out worse than expected (-2.4% vs. -1.9%) but the EUR/USD exchange rate did not move much.
In his speech at GMT 13:00, Mr. Draghi said:
"We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again. Monetary policy will remain accommodative." (Source: Bloomberg)
This was interpreted by the market participants as a signal that another rate cut may follow, if needed. The euro lost about a half cent against the USD and is currently trying to recover. As of time of writing it trades around the $1.3070/80 area.
Tuesday, May 7
EU Germany Factory Orders (Y-o-Y) (Mar.)
USA IBD/TIPP Economic Optimism (M-o-M) (May.)
The analysts' expectations on Tuesday are in favor of the U.S. data. A positive surprise on the Germany factory orders could lift the risk-on sentiment and benefit the single currency. On the other hand, a negative surprise on the U.S. economic optimism could have a negative effect on the euro.
Wednesday, May 8
EU Germany Industrial Production (Y-o-Y) (Mar.)
USA MBA Mortgage Applications
Wednesday's situation is similar to the Tuesday's one. The expectations for the Germany's industrial production are for a significant decline so any value higher than the expected one could provide support to the single currency.
Thursday, May 9
EU ECB Monthly Report
USA Initial Jobless Claims
The ECB monthly report will show the real effects of the monetary measures the ECB undertakes as it will assess the economic situation in Europe. There is some increased event risk to be expected here, similar to the speech of Mr. Draghi on Monday.
A positive surprise on the U.S. unemployment data would be euro supportive because it will increase the risk-on sentiment.
Friday, May 10
EU Germany Trade Balance (Mar.)
USA FED's Bernanke Speech
A positive surprise could be expected on the Germany trade balance, based on the lower value of the euro for the last two months which are included in the trade balance data. A negative surprise however, could increase the pressure on the single currency because it could mean the Europe's biggest economy may be experiencing difficulties despite the lower value of the euro for the period.
The speech of Mr. Bernanke, Chairman of FED, could provide elevated event risk and volatility in the EUR/USD currency pair. Any signs of a change of the current accommodative policy would put pressure on the single currency against the USD.