EUR/USD Forecast December 24-28

EUR/USD made an impressive breakout to 8 month highs, but eventually lost most of the gains as new worries limited the Santa Rally. The upcoming week is relatively light with planned events, but as we’ve seen, volatility can pick up in illiquid markets.  Here is an outlook on the main market-movers this week and an updated technical analysis for EUR/USD.

 

Last week German IFO Business Climate edged up from 101.4 to 102.4 points, rising above the 101.9 points expected. This was the second increase indicating Germany may lead the EU recovery next year. The Bundes bank foresees growth in the first quarter and further improvement in the coming months. Will this positive trend continue? In the US, the fiscal cliff progress gave a boost to the pair and the failure of Plan B took it away. This theme will continue rocking the markets. Remember that market activity will be extremely low up to Thursday.

EUR/USD daily graph with support and resistance lines on it. Click to enlarge:

1.French Consumer Spending: Friday, 7:45. French consumer spending declined in October by 0.2%, after remaining flat in the previous month. The reading was broadly In line with forecasts. On a yearly base, household spending decreased by 0.5% in October, which was also in line with expectations. Consumer spending in France proved strong and contributed to the unexpected 0.2% growth in gross domestic product. A flat reading is expected.

2.Retail PMI: Friday, 9:10. The Euro zone retail sector continued to contract in November reaching 45.8 from 45.3 in October. Sales declined for the thirteenth consecutive month, remaining well below the level seen one year earlier. However despite the ongoing declines, French retailers registered the slowest fall in sales since June. The holiday season will be crucial for retailers this year.

*All times are GMT.

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EUR/USD Technical Analysis

€/$ started the week by grinding upwards, but a convincing break of the 1.3170 line (mentioned last week), took some time. When this happen, the pair shot up and peaked at 1.3308 before sliding back down.

Technical lines from top to bottom:
In the distance, 1.36 was a cushion in the fall of 2011 and then switched to resistance. 1.3480 was the peak seen in February and provides a significant backstop to 1.340.
1.34 was a stubborn cap during the spring of 2012 and is the far line in the distance. The next stepping stone is at 1.3350, which worked as a pivotal line in the past.
Below, 1.3290 served as resistance before the pair collapsed in May, and despite a small breakout in December, the line remains intact. 1.3240 is now a pivotal line in the middle of December’s high range. It separated trading zones.
1.3180 now replaces 1.3170 after the latter was broken. After the breakout of the long standing peak and double top, 1.3180 served as support. 1.3130 proved to be strong resistance during December 2012 and now switches positions to support.
1.3110 is a minor line after working as temporary resistance in December 2012. 1.3030 provided some support at the same period of time, and also at the end of November 2012. Both are minor in comparison with the next line.
The very round 1.30 line was a tough line of resistance for the September rally. In addition to being a round number, it also served as strong support. It recently worked as a battleground and the pair is now ready for another battle around this line. It is closely followed by 1.2960 which provided some support at the beginning of the year and also in September and October – the line is strengthening once again after temporarily cushioning the fall during December.
1.2880 provided some support in October and also in late November and December. It proved to be a backstop on the initial false rally after Obama’s victory. 1.28 is the bottom border of the range, and was eventually left behind. The pair fell to this low in September and later got close to it.
1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is now a pivotal line in the range. 1.2690 was the new low after the November breakdown, and also provided support on a second downfall attempt in November 2012.
1.2624 was the low in January and now serves as weak support,1.2590 was a cap during August, before the pair surged.
Below, the round number of 1.25 is not only of high psychological significance (USDEUR 0.80) but also worked as support during the summer of 2012. 1.2440 is already a stronger line, that was a clear separator during August.

Long Term Downtrend Resistance Weakening
The line extending from the 2011 peak of 1.4940 (a green line on the chart) was breached during the first week of December, is left for reference.

I remain bullish on EUR/USD
The Santa Rally that the pair enjoyed didn’t fully materialize due to eruption of a new blame game in Washington. However, the sides are not that far, and are likely to do what they always do: cut a last minute deal. If not a full deal, we could get significant improvement in negotiations, and this will weaken the dollar. Also the many positive signs from the US certainly help the “risk on” environment – dollar selling, as seen throughout most of the post financial crisis period.
Regarding Europe, the economy is still suffering, but the debt crisis is now on hold for the holidays. We could see a resumption of drops later on.