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As expected in the last edition of our "week ahead" economic review, the EUR/USD exchange rate did not advanced so vigorously as it was during the previous weeks. The euro lost about 1% of its value against the U.S. dollar and finished the week at $1.2985, slightly below its previous resistance level at $1.30. As long as the pair trades above the EMA200 on the daily graph, the uptrend seems to be still operating.

Stephen Gallo, a foreign-exchange strategist in Credit Agricole SA, said in a Bloomberg article that

There is caution about how much further the risk rally can go without constant stimulus injections to keep sentiment high.

Such an injection could come from the expected speech on Tuesday, September 25 of the ECB President Mario Draghi. On the same day there is a meeting scheduled between him and the German Chancellor Merkel which could provide increased volatility in the currency pair.

The disagreements between the Chancellor Merkel and the French President Hollande reported by Bloomberg, could weight on the single currency at the beginning of the week. The leaders disagree on when the joint banking oversight should start. Germany and some other northern countries are also unsure of whether the ECB should be put in charge of the banks' supervision. Although the tail risk which concerns the yields, liquidity and the financing opportunities of the troubled countries, seems to be subdued for the moment by the ECB bonds buying plans, those disagreements show some of the structural hurdles Europe would have to overcome on its way out of the crisis.

Commitment of Traders

Commitments of Traders

The futures traders increased their long positions in the euro with more than 13%, according to the last commitments of traders report. The short positions declined with 10.6%. The wide spread seen in the previous report was cleared as expected.

The bets on the rise of the euro continue to grow. Currently they are 27% above their average value for the year-to-date and 15% above the last 3-months average value. The short positions are about 30% below both of their respective averages.

The situation in the commercial futures traders deserves attention. Those hedgers are significantly decreasing both of their long and short positions compared to the previous report, with values of 38% and 54% respectively. After gradually increasing their short positions from the beginning of July to a value of about 117T as of September 11, they decreased them to a bit above 53T in the last report. It might be so that they started to see a decreased risk of the euro losing value. The next report will show if this observation could be confirmed.

The Week Ahead

As the effect of the FED's announcement of QE3 and the German constitutional court ruling in favor of the ESM begins to vanish, the euro could remain under pressure during the coming week. A test of the lowest level for the last week ($1.2919) could not be ruled out. A break there could open the door to a temporary decline to the 1.28 area. The ECB's President speech on Tuesday could provide support to the single currency.

As it was already mentioned in the other editions of this review, investors who expect the euro to appreciate against the USD could use a long position in the CurrencyShares Euro Trust (NYSEARCA:FXE). This ETF tracks the EUR/USD currency rate and has an expense ratio of 0.40%. A short position in the same ETF could be used by those who expect the euro to decrease in value against the U.S. dollar.

For the investors who would prefer to diversify more, positions in the PowerShares DB USD Bull (NYSEARCA:UUP) ETF or in the PowerShares DB USD Bear ETF (NYSEARCA:UDN) could be nice options. Both funds are U.S. dollar denominated and track the value of the USD against a basket of six other major currencies. Their expense ratio is 0.50%.

The long term potential for an increased money supply due to various forms of monetary easing, including the QE3, could influence significantly the long term interest rates by increasing the spread between the short term end and the long term end of the yield curve. This could be used in a simple yield chasing strategy which is designed to take advantage of the expected steepening of the yield curve.

Monday, September 24

Event

GMT Time

EST Time

Consensus

Previous

Germany Import Price Index (Aug)

6:00

1:00am

2.9%

1.2%

Germany IFO Business Climate (Sep)

8:00

3:00am

102.4/5

102.3

USA Chicago FED National Activity Index (Aug)

12:30

7:30am

-0.13

USA Dallas FED Manufacturing Index

14:30

9:30am

-1.2

-1.6

The Germany import price index could give hints on the inflation expectations in Europe and thus influence the ECB's easing policy. The ECB's executive board member Benoit Coeure said during the weekend that the ECB may not cut interest rates further because of the high inflation that is currently seen in Europe. Any value of the import index strongly below the consensus could weight on the euro.

The U.S. indexes that are expected to be released on Monday measure the economic activity and show inflationary expectations of the responders. Markets expect a slight improvement in both of the indexes which would be supportive to the USD. A negative surprise could send the euro to the $1.31 area again.

Tuesday, September 25

Event

GMT Time

EST Time

Consensus

Previous

Germany Gfk Consumer Confidence (Oct)

6:00

1:00am

5.9

5.9

EU Draghi - Merkel Meeting

N/A

N/A

EU Draghi Speech

13:00

8:00am

USA Redbook

12:55

7:55am

2.4%

USA Consumer Confidence

14:00

9:00am

62

60.6

USA House Pricing Index (Jul)

14:00

9:00am

0.7%

0.7%

USA Richmond FED Manufacturing Index

14:00

9:00am

-6

-9

USA Treasury Secretary Geithner Speaks

17:30

12:30am

The events that could have the biggest impact on the EUR/USD exchange rate on Tuesday are:

  1. The meeting between ECB's President Draghi and the German Chancellor Merkel;
  2. The speeches of Mr. Draghi and Mr. Geithner.

Mrs. Merkel is also expected to speak on an economic forum so her words could also influence the exchange rate.

The market would expect the EU officials to give a further, be it only verbal, stimulus to the hope-fueled rally. Anything short of this could trigger a strong short term appreciation of the USD.

The U.S. Redbook is interesting as it would show the level of consumption the U.S. economy experiences and would give hints on the consumer sentiment. The same is valid for the consumer confidence index published later during the day. Any negative surprise on both indicators would weight on the U.S. dollar.

Wednesday, September 26

Event

GMT Time

EST Time

Consensus

Previous

Germany Retail Sales (Aug)

6:00

1:00am

-0.7%

-1.0%

Germany Harmonized Index of Consumer Prices

12:00

7:00am

2.00%

2.2%

USA Mortgage Applications (Sep 21)

11:00

6:00am

-0.2%

USA New Homes Sales (Aug)

14:00

9:00am

0.380M

0.372M

USA New Homes Sales Change (Aug)

14:00

9:00am

3.6%

Wednesday starts with the Germany's retail sales which are expected to show a slower decline compared to the previous reading. A positive surprise here would support the euro.

The Germany's HICP could be used as an indicator of the inflation expectations in Europe. A value above the consensus would support the euro at first although in long term a strongly elevated inflation could harm the real growth prospects.

Of the U.S. indicators the 'new homes sales' is a widely followed one which could create an increased volatility in the EUR/USD pair. The market consensus is in favor of a slight increase. Any surprise here would drive the value of the U.S. dollar in the direction of the surprise.

Thursday, September 27

Event

GMT Time

EST Time

Consensus

Previous

Germany Unemployment Change

7:55

2:55am

10K

9K

EMU M3 Money Supply (Aug)

8:00

3:00am

3.2%

3.8%

Italy 10-y Bond Auction

N/A

N/A

5.82%

EU Business Climate

9:00

4:00am

-1.21

EU Consumer Confidence

9:00

4:00am

-26

-24.6

USA Durable Goods Orders (Aug)

12:30

7:30am

-4.4%

4.2%

USA Gross Domestic Product (Q2)

12:30

7:30am

1.7%

1.7%

USA Gross Domestic Purchases Price Index (Q2)

12:30

7:30am

1.6%

USA Initial Jobless Claims

12:30

7:30am

375K

382K

USA Personal Consumption Expenditures (QoQ) (Q2)

12:30

7:30am

2.5%

USA Pending Home Sales (Aug)

14:00

9:00am

-0.7%

2.4%

Thursday is again the day with the biggest amount of data.

A bigger than expected change in the unemployment in Germany would weight on the single currency.

The M3 money supply would show important hints on the inflationary pressures in the EU area. The market expects a decline, whereas an increase would mean the ECB could be pressed to change the current policy of monetary easing in order to stay true to its price stability mandate.

The Italy auction would indicate the market sentiment concerning the recent ECB announcements to step as a buyer on the secondary bond market. A surprising increase of the yield could significantly weight on the euro prospects.

Positive surprises on the EU business climate and consumer confidence would support the euro and could lead to its appreciation.

The U.S. GDP is an important indicator but the markets do not expect its value to be much different than the previous one. Any positive surprise here would support the USD. The same is true for the domestic purchases price index which hints the inflation pressure on the consumers.

The pending home sales marked an increase in their previous reading. Not being able to keep the direction in this release would weight on the USD.

Friday, September 28

Event

GMT Time

EST Time

Consensus

Previous

USA Core PCE Price Index (Aug)

12:30

7:30am

1.6%

USA Personal Income (Aug)

12:30

7:30am

0.2%

0.3%

USA Personal Spending (Aug)

12:30

7:30am

0.5%

0.4%

USA Chicago PMI

13:45

8:45am

53

USA Reuters/Michigan Consumer Sentiment Index

13:55

8:55am

78.9

79.2

Friday's significant events are mostly concentrated in the U.S.A. The core PCE price index is widely followed as an inflation indicator. A reading above the previous one would indicate an elevated inflation pressures in the U.S. and would be supportive for the USD.

The personal income is closely connected with consumption so the higher the income, the higher the consumption is expected to be. A negative surprise would weight on the U.S. dollar.

A surprising value of the Chicago PMI index below 50 would be strongly supportive for the euro.

A surprising value of the Reuters/Michigan consumer sentiment below the consensus estimate would mean the consumers are not increasing their confidence in the economic activity and would weight on the USD.

Source: EUR/USD: The Week Ahead