EUR/USD: The Week Ahead

Nov.25.13 | About: CurrencyShares Euro (FXE)

Last week was an interesting one in the EUR/USD pair trade. After initial appreciation of the euro, it made a decline of 1% on Wednesday. This decline was most probably connected with the FOMC minutes which signaled the FED might consider making a start of the tapering on one of its next meetings. After falling down to as low as $1.3398 on Thursday, the single currency started to gain again and finished the week at $1.3548. This translates into a gain of 0.41% for the week. Still the short-term trend is more USD positive than euro supportive and the euro has not broken some major resistance levels.

Economic expectations continue their positive tone for the week ahead. As written in our previous EUR/USD: The Week Ahead economic review, if those expectations are confirmed, this could lead to a renewal of the FED's tapering notion in the market which would be USD positive in a longer term.

Technically speaking, the euro continues to be on its crucial line of resistance. $1.35-$1.37 are levels at which the single currency was stopped at the beginning of 2013 and back in the 2005. However, longer MA's are euro positive so the bigger trend seems positive for the single currency. After failing to change that trend last week and covering all the loss from Wednesday, euro could be able to try to enhance beyond its current level of $1.3535/40.

The Week Ahead

The most important risk events for the week are the U.S. consumer confidence (Tuesday), U.S. durable goods (Wednesday), Germany's inflation and unemployment (Thursday) and European CPI (Friday). Those economic events have the potential to determine the near term direction of the EUR/USD pair.

This week's analysts optimistic expectations (56%) are slightly above those for the previous week (~53%). Still economic expectations are more positive than negative. Consensuses are more optimistic for the U.S data (67%) than for the European one (47%). The positive economic expectations for the U.S. are higher by 144% while those for Europe experience a decline of 43%. In general if there are no negative surprises on the U.S. data, this would be USD positive due to renewed expectations of FED's tapering, having in mind the last week's FOMC minutes. The correlation between the last 4 week change in the overall optimistic expectations and the change in the EUR/USD rate for the respective weeks turns to a positive ground and now stands at 0.18. We believe that currently we are in a situation where positive data from Europe would lead to appreciation of the euro and positive U.S. data would be USD supportive and hence, euro negative. Still this relationship does not seem to be so obvious but our expectations are that the more market grasps again the idea of a rather sooner than later FED's tapering, the more clear the relationship would become. The change of the correlation to a positive value supports our view.

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%.

Another option is to use the Barclays iPath EUR/USD exchange rate ETN (NYSEARCA:ERO). It is an ETN with an expense ratio of 0.40%. Its only holding is euro. Investors who believe the USD will continue to appreciate could take advantage of a short position in the ETN, and vise versa. Like all ETNs, ERO has some differences in taxation in different jurisdictions compared to an ETF. Readers are encouraged to consult a tax professional.

Those who are not feeling comfortable with or are not allowed to take short positions but still expect the euro to depreciate, could utilize a long position in the ProShares Euro Short ETF (NYSEARCA:EUFX). It tracks the inverse of the U.S. dollar price of the euro. This ETF is a commodity pool and as such has a slightly higher expense ratio (0.95%).

Monday, November 25

Event

GMT Time

EST Time

Consensus

Previous

USA Pending Home Sales (Y-o-Y) (Oct.)

15:00

10:00am

 

-1.2%

USA Dallas FED Manufacturing Index (Nov.)

15:30

10:30am

 

3.6

Click to enlarge

Again Monday is not presenting us with much economic data. Any negative surprise on the U.S. data could put weight on the USD. On the contrary, positive surprises could lead to an USD appreciation.

Tuesday, November 26

Event

GMT Time

EST Time

Consensus

Previous

USA Housing Starts (Oct.)

13:30

8:30am

0.910M

0.891M

USA Building Permits (M-o-M) (Oct.)

13:30

8:30am

0.940M

0.918M

USA Consumer Confidence (Nov.)

15:00

10:00am

72.5

71.2

USA Housing Price Index (M-o-M) (Oct.)

15:00

10:00am

0.5%

0.3%

Click to enlarge

Tuesday data is expected to be generally positive. Again negative surprises would weigh on the USD while positive would support it. Consumer confidence is the most important indicator for the day so around the time of its release an increase of the volatility in the pair could be expected.

Wednesday, November 27

Event

GMT Time

EST Time

Consensus

Previous

EU Germany Gfk Consumer Confidence Survey (Dec.)

07:00

2:00am

7

7

USA Durable Goods Orders (Oct.)

13:30

8:30am

-1.5%

3.7%

USA Durable Goods Orders ex. Transportation (Oct.)

13:30

8:30am

0.2%

-0.1%

USA Initial Jobless Claims (Nov. 23)

13:30

8:30am

331K

323K

USA Chicago Purchasing Managers' Index (Nov.)

14:45

9:45am

62.0

65.9

USA Reuters/Michigan Consumer Sentiment Index (Nov.)

14:55

9:55am

73.1

73.2

USA CB Leading Indicator (Oct.)

15:00

10:00am

0.1%

0.7%

Click to enlarge

The data on U.S. durable goods is the most expected indicator for Wednesday. Market expects a decline and a positive surprise could add much support to the USD. The same is valid for the jobless claims and the other three leading indicators. In general, if the expected lower-than-previous values of the purchasing managers' index, the consumer sentiment and the leading indicators are confirmed, this would mean the future in front of the U.S. economy is not so bright as hoped for. This could have an USD negative effect.

Thursday, November 28

Event

GMT Time

EST Time

Consensus

Previous

USA Thanksgiving Day

24h

     

EU Germany Unemployment Change (Nov.)

08:55

3:55am

3K

2K

EU Germany Unemployment Rate (Nov.)

08:55

3:55am

6.9%

6.9%

EU M3 Money Supply (Y-o-Y) (Oct.)

09:00

4:00am

2.0%

2.1%

EU Consumer Confidence (Nov.)

10:00

5:00am

-14.5

-14.5

EU Economic Sentiment Indicator (Nov.)

10:00

5:00am

98.1

97.8

EU Germany Consumer Price Index (Y-o-Y) (Nov.) p

13:00

8:00am

1.2%

1.2%

Click to enlarge

Thursday is a holiday in the U.S. so only European data will be released. Moreover, the volatility could be lowered because of a smaller amount of participants in the market. On the other hand, the data from Europe is an important one so the day should not be neglected. Negative surprises on the Germany unemployment, the EU consumer confidence or economic sentiment indicator could put pressure on the single currency. A smaller-than-expected value of M3 money supply generally should be euro supportive because of a smaller amount of "wide" money in the EU economy and therefore smaller expectations of a higher inflation. If the inflationary expectations in Europe start to grow, whether due to a higher value of Germany's CPI data or due to a higher value of M3 supply, this could put some pressure on the ECB to tighten its monetary policy. This technically would be euro supportive.

Friday, November 29

Event

GMT Time

EST Time

Consensus

Previous

EU CPI (Y-o-Y) (Nov.) p

10:00

5:00am

0.8%

0.7%

EU Unemployment Rate (Oct.)

10:00

5:00am

12.2%

12.2%

Click to enlarge

The EU CPI data that we talked about on our Thursday's reflections is expected to be released on Friday. A higher-than-expected value could be euro supportive due to the already mentioned ECB considerations. Negative surprise on the unemployment could lead the European central bank to try to release even more its monetary easing policy which would be euro negative.

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.