During the last week, the euro continued its appreciation against the USD. It marked an increase of 1.7% and finished the week above the $1.32 level (at $1.3216).
As expected in the last edition of our "EUR/USD: The Week Ahead" review, market expectations about the central banks' monetary policies on both side of the Atlantic played a significant role in the EUR/USD movements. The main reason for the recent euro appreciation was a combination between the hawkish rhetoric of Mr. Mario Draghi on the ECB press conference and diminishing expectations that the Fed will soon start to tighten its monetary policy due to declines in several U.S. economic indicators.
During the current week, the speech of Fed governor James Bullard on Monday might possibly give more light regarding the Fed's expected course of action.
Technically speaking, the euro broke some important resistance points ($1.32 and $1.3240) but as of time of writing again trades below those points (around $1.3185/95, where lies a 23 Fibonacci retracement level). If this level holds, we could see the euro trying to get through the above mentioned resistance points at first, with the highest level of the last week ($1.3305) being the target. Otherwise, a decline to around $1.3110/20 might follow in the short term.
The Week Ahead
The most important risk events of the week are the Germany CPI and the ruling of the German constitutional court regarding the legitimacy of OTM (Wednesday), U.S. retail sales (Thursday) and the Europe CPI and U.S. industrial production (Friday). Those have the potential to present an increased volatility in the EUR/USD exchange rate and determine the near term direction of the pair.
This week's analysts expectations are mostly optimistic, marking the higher value of COI for the year to date. About 85% of the expectations are for better-than-previous values, which is almost 90% higher than the previous week's optimistic expectations. The consensus is more optimistic for the European data (89%) than for the U.S. one (75%), with the positive economic expectations for Europe growing faster than the ones for the U.S. Such a high level of optimism leaves room for negative surprises, which if it happens, would hurt the single currency. Moreover, the correlation between the last 4 week change in the optimistic expectations and the change in the EUR/USD rate for the respective weeks continues to be negative (-0.55).
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 (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 (UUP) and the PowerShares DB USD Bearish ETF (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 ratios are 0.50%.
Monday, June 10
EU Sentix Investor Confidence (June)
U.S.A. Fed's Bullard Speech
Monday is relatively calm concerning the economic data. In line with the optimistic mood of the EUR/USD pair, the analysts expect an improvement of the Sentix investor confidence. A negative surprise here would put pressure on the euro.
The expectations that a Fed's exit is close which possibly were among the main recent drivers of the EUR/USD rate, retreated a bit during the last week. Hence, the speech of Mr. Bullard, who is a voting member of the Fed, would be followed with interest. Any hint that an exit is still close has the potential to make the U.S. dollar appreciate.
Tuesday, June 11
U.S.A. NFIB Business Optimism Index (May)
A decline of the business optimism index might put some pressure on the USD due to possible expectations that the Fed would have to continue its easy monetary policy longer than expected.
Wednesday, June 12
EU Germany CPI (Y-o-Y)
EU Germany harmonized Index of Consumer Prices
EU Industrial Production (April)
EU Germany Constitutional Court Ruling on OTM Bond Buying
U.S.A. Monthly Budget Statement
European data on Wednesday is expected to support the lack of imminent need of a rate cut in front of the ECB. The inflation data is expected to show increases which would make the central bank more cautious when operating its monetary policy. On the other hand, industrial production is expected to show a smaller-than-previous decline, which also supports the idea that no rate cut is immediately needed. All those would be euro positive. Hence, any negative surprises could put pressure on the single currency.
The German constitutional court is expected to rule in favor of the latest bond buying program of the ECB, the OTM. Any negative surprise here could have a strong negative effect on the euro.
Thursday, June 13
EU ECB Monthly Report
U.S.A. Retail Sales (M-o-M)
U.S.A. Initial Jobless Claims
U.S.A. Business Inventories (April)
The ECB monthly report could enhance the picture investors hold about the economic developments in Europe. A healthier economic climate would be euro positive, while any worrisome signals could put weigh on the European currency.
Any negative surprises on any of the expected U.S. data on Thursday would put pressure on the USD.
Friday, June 14
EU CPI (Y-o-Y)
EU Employment Change (Q1)
U.S.A. Producer Price Index (Y-o-Y)
U.S.A. Industrial Production (M-o-M)
U.S.A. Reuters/Michigan Consumer Sentiment Index (June) p.
On Friday the flow of inflation data continues. A negative surprise (lower-than-expected value) here could negatively affect the euro. A continuation of the negative trend of the EU employment would also put some pressure on the single currency.
Positive U.S. data could lead to USD appreciation due to renewed expectations that the Fed would decide to reduce its monetary easing program.