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During the last week, the euro continued its decline and finished 1.2% lower than the previous Friday ($1.283 vs. $1.2985). As we expected in our previous "EUR/USD: The Week Ahead" review, at first the single currency tried to appreciate and touched the $1.3030 area on Tuesday. This was a short lived correction however, and the rest of the week was marked by a declining euro.

Negative news regarding the euro and European economies continued to come during the week. The German and EU GDP came out worse than expected and intensified worries about the health of European economy. They also increased the notion that another rate cut from the ECB might be needed.

On Friday, Mr. Coeure, Executive Board member of the ECB, said the central bank is looking at "options to spur lending to smaller companies", as cited by Bloomberg. The European central bank would not be much willing to directly reduce the risk premiums paid by the smaller companies at the expense of easier access to financing, Mr. Coeure said. This could limit the amount of actions the ECB would undertake. The bigger part of work regarding the easier access to financing would have to come from within the direct lenders and the small and medium companies themselves.

The longer term technical picture remains euro negative. On a short-term horizon, the euro might recover some of its losses from the last week. As of time of writing, it trades in the $1.2840 area, after going to as low as $1.2796 on Friday. If it breaks above the current levels, the next first resistance would be in the $1.2890 area. In a more optimistic course of events, the single currency might target the $1.2945 area (38.2 Fibonacci retracement from the May 8 top around $1.319) before starting to decline again.

The Week Ahead

The most important risk events of the week are the testimony of Mr. Bernanke and the FOMC minutes (Wednesday), European consumer confidence (Thursday) and the U.S. durable goods (Friday). Those have the potential to present increased volatility in the EUR/USD exchange rate.

This week's analysts expectations continue the optimistic mood from the previous week. Almost 76% of the expectations are for better-than-previous values, which is about 50% more than the previous week's optimistic expectations. The consensus is again more optimistic for the U.S. data (85%) than for the European one (71%), with the positive expectations for U.S. growing faster than the ones for Europe. In the midst of the negative mood towards the euro caused by the possibility of another rate cut on behalf of the ECB, the higher amount of positive expectations for the U.S. data could favor the USD in the EUR/USD currency pair.

The current value of our Consensus Optimism Index (COI) is 76, up from about 51 for the previous week, and is close to the highest value (79) measured in the last 9 months. Hence, the probability of negative surprises regarding the economic data seems to be elevated.

The index shows the proportion the positive consensus estimates take in all the estimates we have available for the rest of the 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 20

Event

GMT Time

EST Time

Consensus

Previous

U.S.A. Chicago Fed National Activity Index (April)

12:30

7:30am

-0.23

On Monday there is a bank holiday in Europe so the main data would come from the U.S. A better-than-previous value of the national activity index would increase the notion that the U.S. economy is getting healthier. This has the potential to increase the expectations that the FED would rather sooner than later start to unwind its positions. Hence, a positive value here could support the USD due to relative expected monetary strength.

Tuesday, May 21

Event

GMT Time

EST Time

Consensus

Previous

EU Germany PPI (Y-o-Y) (April)

06:00

1:00am

0.3%

0.4%

The German PPI data, if released as expected, could support the USD because it would imply the inflation pressure in one of Europe's strongest economies would remain low. This could support the expectations of diminishing worries in front of another rate cut on behalf of the ECB.

Wednesday, May 22

Event

GMT Time

EST Time

Consensus

Previous

EU European Council Meeting

N/A

N/A

EU Current Account (March)

08:00

3:00am

€15.0B

€16.3B

U.S.A. Existing Home Sales Change (M-o-M) (April)

14:00

9:00am

1.2%

-0.6%

U.S.A. Fed's Bernanke Testifies

14:00

9:00am

U.S.A. FOMC Minutes

18:00

1:00pm

Wednesday probably carries the biggest event risk for the week. The members of the European Council are expected to discuss European union tax issues and may address the work done on the deepening of the European Monetary Union.

A positive surprise is possible on the EU current account due to the depreciated euro for the period. The lower euro could have increased the European export. Such a surprise would be euro positive.

The two most important events for Wednesday are the testimony of Mr. Bernanke on the current state of the U.S. economy and the FOMC minutes. Those have the potential to reveal the intentions of FED regarding its monetary policy. Any hint of tightening this policy, could be strongly USD positive, and vise versa. A higher degree of volatility could be expected around the time of the two events.

Thursday, May 23

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Markit Manufacturing PMI (May) p.

07:28

2:28am

48.4

48.1

EU Markit Composite PMI p.

07:58

2:58am

47.2

46.9

U.S.A. Initial Jobless Claims

12:30

7:30am

347K

360K

U.S.A. Markit Manufacturing PMI p.

12:58

7:58am

53.0

52.1

EU Consumer Confidence p.

14:00

9:00am

-21.9

-22.3

The expectations for all of the Thursday data are for better-than-previous values. This by itself, presents enough room for negative surprises. If realized, those could support the USD because it is regarded as the risk-off currency in the pair.

Friday, May 24

Event

GMT Time

EST Time

Consensus

Previous

EU Germany GFK Consumer Confidence Survey (June)

06:00

1:00am

6.2

6.2

EU Germany GDP (Q-o-Q) (Q1)

06:00

1:00am

0.1%

-0.6%

EU Germany IFO Current Assessment

08:00

3:00am

107.1

107.2

EU Germany IFO Expectations

08:00

3:00am

102.0

101.6

U.S.A. Durable Goods (April)

12:30

7:30am

1.1%

-5.7%

Any negative surprise on the German GDP would weigh on the single currency, whereas a positive or no surprise, would be euro supportive.

The U.S. durable goods is the main risk event for the day. A negative surprise here could impact negatively the U.S. equity markets and cause an appreciation of the single currency due to reduced expectations that the Fed would hurry to tighten its easy monetary policy.

Source: The EUR/USD Week Ahead