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EURUSD Weekly Outlook: Neutral/Bullish. See sections on the technical picture and fundamental drivers behind it for analysis behind this outlook, price zones and fundamentals to monitor that could change or further reinforce this outlook, real-time trader positioning sample

The following is a partial summary of the conclusions from the fxempire.com weekly analysts' meeting regarding the outlook for the EURUSD, market drivers, likely trading price action, etc.

Highlights

1. Weekly Technical Picture

2. The Fundamental Drivers

a. Fed ECB Policy & Rate Gap Still Not Widening, Weaker US Data

b. Top German Court Refers Ruling On Legality Of OMT to EU Court

c. Meaning Of The Weak US Jobs Report: Bullish For The EURUSD

3. Key EURUSD Market Movers This Week

4. Keys To Next USD Rally

5. Real Time Sample Retail Trader Positioning As of Friday Close

First we look at the technical picture for overall context, and then drill down to the fundamentals behind it.

Weekly Technical Picture

Here's the EURUSD weekly chart as of the end of last week.

(click to enlarge)

EURUSD WEEKLY CHART JULY 2012 - PRESENT

KEY:

10 WEEK EXPONENTIAL MOVING AVERAGE (NYSEMKT:EMA) DARK BLUE, 20 WEEK EMA YELLOW, 50 WEEK EMA RED, 100 WEEK EMA LIGHT BLUE, 200 WEEK EMA VIOLET

DOUBLE BOLLINGER BANDS: NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE

Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

02 feb 091034

Key Points Bearish

The EURUSD only partially recovered its prior week losses, creating a "lower high" that extends and reinforces the 6 week old descending channel.

The 10 week EMA, our shortest, most sensitive to change, has turned downward.

Bullish

The bounce kept the pair from falling into the lower quarter of the double Bollinger bands, the 'sell zone' that suggests momentum is now downward and that the odds favor a deeper decline. Instead the pair returns to the safety of the middle 'neutral zone' that suggests the odds favor a flat trading range which is unlikely to be profitable for anyone but short term traders. See here for a full explanation of how to use double Bollinger bands, one of the very most useful technical indicators.

That bounce also gets the pair back over its medium term up trend line that began in mid-July 2013 (red).

Price Areas To Watch For Medium/Long Term Traders

For reasons we discuss in depth in our book, our focus is on the medium and longer term holding periods that provide simpler, safer trading opportunites for most traders and give them a better chance of being in the small minority of consistently profitable traders.

Likely Trading Range

For the coming week assume more range trading within the 1.34720 - 1.37500 range. That's wide enough for the shorter term traders using time daily and shorter time frames, but not for longer term traders.

Breakout Points - 1.37100 and 1.34750:

A decisive break over 1.37100 puts us back in the double Bollinger band buy zone, takes us over 5+ week resistance, and puts the odds in favor of a sustained move higher to test resistance in the 1.3870 area.

A decisive move below the 1.34750 area puts us below 3 month old support and also puts us back into the double Bollinger band sell zone, making a test of 1.3350 resistance area likely (which is where 50 and 100 week EMAs converge, and which has proven a support/resistance area since June of 2013).

So that's the technical picture and some ideas on what to do with it. Now we drill down to look at the fundamentals behind it and that will drive it this week and beyond.

Fed ECB Policy & Rate Gap Still Not Widening, Weaker US Data

The main fundamental drivers behind the price action were:

· ECB's deferring any further EUR-dilutive easing

· A second straight month of weaker than expected US jobs data (which lowers the chances of a USD- bullish taper acceleration)

· General calming about the emerging markets (NYSE:EMS), which allowed for a general stabilization and minor recovery in risk appetite as depicted by most of our sample US, European, and Asian indexes shown below.

(click to enlarge)

WEEKLY CHARTS OF LARGE CAP GLOBAL INDEXES WITH 10 WEEK/200 DAY EMA IN RED: LEFT COLUMN TOP TO BOTTOM: S&P 500, DJ 30, FTSE 100, MIDDLE: CAC 40, DJ EUR 50, DAX 30, RIGHT: HANG SENG, MSCI TAIWAN, NIKKEI 225

Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

04 feb 09 0049

That said, the key take-away from the sample of leading global stock indexes shown below, which we use as global risk barometers for reasons covered here, is that the breakdown in the over 18 month up trend on the weekly charts halted this past week, but it did not reverse. We have calm, a temporary bottoming, but not a rebound. Not yet.

In sum, the big developments in the US and EU were bullish for the EUR, bearish for the USD, while relative calm about the EM's eliminated a big drag on risk appetite and allowed at least a moderate improvement in risk appetite that allowed the pair its minor recovery.

Top German Court Refers Ruling On Legality Of OMT to EU Court: Short Term Neutral, Long Term Bearish For The Pair

Although the German Constitutional Court clearly doubts that the OMT is within the ECB's powers, along with anything resembling a US-style QE, it avoided ruling against such moves.

  • The Court said that there are "important reasons to assume that it exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget."
  • However, the court "also considers it possible that if the OMT Decision were interpreted restrictively," it could be legal.

The ECB tweeted that its Outright Monetary Transactions (OMT) program was within its mandate.

The key takeaway is that Germany appears to be ceding its veto over some kind of EUR dilutive, inflation risking, expansion of the money supply. In the near term, that means little, as the ECB is not yet ready for such moves.

However, as we have argued here, it's just a matter of time before the EU must choose between some kind of large scale money supply creation, (be it technically money printing or not) and the EU's survival in its current form.

Meaning Of The Weak US Jobs Report: 6 Reasons Bad Was Good For The EURUSD

For the second consecutive month, the U.S. added fewer jobs than anticipated (113k vs 180k forecasted). However this time investors focused on the positive perspective: the US is still growing and a taper acceleration is less likely. So why not rally a bit? Other positives included:

1. The unemployment rate continued to drop

2. Average hourly earnings and the labor force participation rate increased.

3. The monthly payrolls report can be volatile anyway

4. Jobs growth, and the recovery, are still continuing. During the past 6 months, the U.S. is still adding 177,500 jobs per month on average.

5. Of equal importance, the report meant that the US has growth AND a lower chance that the Fed might accelerate the taper. The current rate of taper is priced in, however acceleration is not, and any such surprise could pressure risk assets and boost the USD.

6. The 0.2% increase in average hourly earnings and the labor force participation rate suggests that jobs are paying better and that encourages people to return to the worker force. That explains how the broader and more reliable U6 unemployment rate also dropped from 13.1% to 12.7%, its lowest level since November 2008.

Given the above, it's no surprise that on Friday stocks were up and the USD was down. The jobs report signaled:

· Growth without faster taper: bullish for risk assets.

· Less chance of the two things most likely to lift the USD:

o A deeper market selloff that increases the USD's appeal as a safe-haven

o The odds of a faster taper, which raises the USD's appeal as a less diluted currency with higher interest rates coming sooner than expected

In sum, markets got the bullish message of continued gradual recovery without the bearish increasing of odds of the FOMC announcing an accelerated taper. Instead, due to weaker job growth, the Fed is now more likely to amend its forward guidance as the unemployment rate has long passed the 7% rate that was supposed to signal the end of QE, and it now approaches their 6.5% threshold for accelerating the taper AND for discussing the pace and timing of actual interest rate hikes.

Given the recent selloffs in risk assets, and their nascent rally Thursday and Friday, it seems that investors are still inclined to see the past weeks' selloff as more of a buy the dip opportunity than a start of a more prolonged pullback, despite the technical damage to the leading global stock indexes shown above.

Thus Janet Yellen's first decision at the helm of the FOMC (arguably the most powerful unelected body in the democratic world - you go girl!) will be to decide whether to lower the threshold, downgrade its importance, or drop it completely like Fed President Lacker had proposed earlier this week, saying that the Fed "will have to reformulate and provide some qualitative way of providing an assessment of what time horizon we think is most likely" for rates to start rising. Translation: "we need to make clear that we're not tightening yet, so everybody stay calm."

What will the Fed do? Funny you should ask.

Key EURUSD Market Movers This Week Yellen Testimony

This week Yellen gives her very first semi-annual testimony on the economy and monetary policy. Along with retail sales, it could be the biggest market mover on the US calendar. Which is more influential depends on which provides a bigger surprise.

Here's what you need to know about what could be the biggest market moving event of this week.

Our first chance to hear Yellen's interpretation of the data and here response to it is this week, when she gives her very first semi-annual testimony on the economy and monetary policy.

She testifies before the House on Tuesday and Senate on Thursday. Her prepared remarks will be released 8:30am EST Tuesday, 90 minutes before she delivers her first policy address on the economy as Federal Reserve Chairman.

She'll be asked about what the Fed plans to do with their 6.5% unemployment rate threshold and most likely she'll answer that the FOMC will reevaluate the forward guidance in March.

Retail Sales

As always, retail sales could also be a big market mover, given the ~70% of GDP that consumer spending comprises. It is expected to remain at only 0.2%, the same as in the previous month. A strong reading would usually be bullish for risk appetite and thus the pair, but now the likely market reaction is less certain. If markets interpret the result as they did the jobs reports - growth without higher risk of accelerated taper - that would be bullish for the EURUSD. An opposite interpretation would be bearish for it.

Weak demand is another challenge that Yellen needs to address early in her term.

Other Key Calendar Events

Tuesday

China Data Dump: Trade balance is the big one. There's also money supply, and new loans. Remember for all the blame placed on the Fed taper as a source of emerging market volatility, that China's slowdown and policy moves, have been disruptive for EMs. Bullish results are bullish for the pair.

Thursday

US

In addition to the above mentioned retail sales and Yellen testimony, there's weekly unemployment claims, which could be market moving only if it produces a major surprise.

EU

The Italian 10 year bond auction might be market moving, but only if there's a very surprising result. Markets will be watching to see if it suggests continued appetite for EU periphery bonds

Friday

China: YOY CPI and PPI - given ongoing concerns about rates and liquidity, if this influences overall risk appetite it could move the EURUSD .

EU: There's French, German, Italian preliminary GDP, and EU flash GDP. These could be market moving if they show a consistently positive (bullish for the EURUSD) or negative result (bearish for it)

US: Preliminary UoM consumer sentiment might matter if it sends a starkly different message than the actual retail sales data from Thursday.

Keys To Next USD Rally: Surprise Taper Acceleration, Or Rising Risk Aversion

Given the US jobs reports, we don't see the Fed accelerating the taper or making other surprise tightening moves at this time. That leaves a bout of stronger risk aversion as the USD's best hope in the near term.

Sample Real Time Retail Trader Positioning

Although our outlook for the coming week is neutral -bullish on the pair for reasons given above, our real time sample of retail traders (average holding period 8 weeks) from forexfactory.com shows a strong bearish shift. Last week they were 56% long, 44% short the pair, as discussed here.

This week they've swung back to 37% long 63% short, a far more typical positioning ratio for the past months.

Source: forexfactory.com

06 feb 09 11 10

Stay tuned for our posts on lessons for the coming week, key market movers, and a 2 minute drill overview of prior week market drivers here. For full discussion of double Bollinger bands, the pros and cons of our safer, simpler longer term forex trading methods, take a free look at our book using the "Look Inside" feature here.

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Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.

Source: EUR/USD Weekly Outlook: Likely Direction, Must-Watch Drivers, Price Points