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EUR/USD forecast for the week of May 19, 2014
The EUR/USD pair fell during most of the week, but did manage to close right at the 1.37 handle, which is significant as it would has been both supportive and resistive recently. On top of that, there is an uptrend of sorts still being held by a line there, and as a result we feel that this market could continue to go higher. We may have just found the summer range – the area between the 1.37 level on the bottom, and the 1.40 level on the top.
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EUR/USD Forecast May 19-23
EUR/USD had a second consecutive week of falls, but it managed to close above the lows and above uptrend support. Where is it headed next? Another busy week awaits the pair, with PMIs and the German IFO figure standing out. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
The euro received no mercy from the ECB after Draghi’s statement about imminent action in June. More reports and comments from the Bank pushed the currency lower. In addition, the weak growth rate of 0.2% in Q2 certainly weighed on the common currency. German growth is not sufficient, and looking at the ZEW index, it is not necessarily that strong either. In the US, data remains generally positive, but far from outstanding.
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EUR/USD weekly outlook: May 19 - 23
The euro slid lower against the dollar on Friday following the release of uneven U.S. data, as concerns over the strength of the recovery in the euro zone added to pressure on the European Central Bank to ease monetary policy.
EUR/USD was at 1.3693 late Friday, holding just above the two-and-a-half month low of 1.3647 struck in the previous session. For the week, the pair was down 0.45%.
The pair is likely to find support at 1.3647 and resistance at 1.3731, Thursday’s high.
The Commerce Department reported Friday that U.S. housing starts rose 13.2% last month, after a 2.0% increase in March.
It was the largest increase in five months, indicating that the economy is shaking off the effect of a weather related slowdown over the winter.
The upbeat housing data was overshadowed by a report showing that consumer confidence in the U.S. deteriorated this month. The University of Michigan's consumer sentiment index dropped to 81.8, from 84.1 in April. Analysts had expected a slight uptick to 84.5.
The single currency remained under pressure after weaker-than-expected data on euro zone first quarter growth on Thursday added to pressure on the ECB to ease monetary policy at its next meeting in June, in order to safeguard the recovery in the region.
The euro zone’s gross domestic product grew just 0.2% in the first quarter Eurostat reported, compared to expectations for growth of 0.4% and expanded by a smaller than expected 0.9% from a year earlier.
The French economy stagnated in the first three months of the year, while Italy, Portugal and the Netherlands all reported contractions.
Germany’s economy, the euro zone largest, outperformed in the first three months of the year, expanding 0.8%, beating expectations of 0.7%.
Also Thursday, Eurostat reported that the annual rate of inflation in the euro zone was unchanged at 0.7% in April, in line with forecasts. The inflation rate is still well below the ECB target of close to but just under 2%.
Meanwhile comments by a senior EBC official fuelled speculation that the bank is preparing to act at its next meeting to shore up the recovery in the currency bloc and stop inflation from falling too low.
In an interview with The Wall Street Journal, ECB Vice President Vitor Constancio said Thursday the central bank was open to more monetary easing and was determined to act swiftly if required.
EUR/JPY ended Friday’s session at 139.03, down 0.17% for the day, after falling to lows of 138.78 earlier in the session, the weakest since February 12.
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Deutsche Bank to raise more than $10 billion
Deutsche Bank AG [de: dbk] said Sunday it plans to raise 8 billion euros ($10.96 billion) as it seeks to soothe fears about its capital strength. The bank said it would raise €6.3 billion of new equity through a rights issue of up to 300 million new shares and another €1.75 billion through Qatar's Paramount Holdings Services Ltd., which agreed to buy 60 million shares at €29.30 a share. The measures are expected to increase a key gauge of the bank's financial strength, its core Tier 1 level, to 11.8% from 9.5% currently.
Swedish unemployment rate 8.7% vs. 8.5% forecast
Sweden’s unemployment rate rose unexpectedly last month, official data showed on Monday.
In a report, SCB - Statistics Sweden said that Swedish Unemployment Rate rose to 8.7%, from 8.6% in the preceding month.
Analysts had expected Swedish Unemployment Rate to fall to 8.5% last month.
Draghi Isn’t Doubted as Economists Await ECB Policy Stimulus
Mario Draghi has left little room for doubt.
Ninety percent of economists in the Bloomberg Monthly Survey predict the European Central Bank president will ease monetary policy in June after saying on May 8 that officials are “comfortable” with acting then. While that allows investors to prepare for added stimulus and a weaker euro, it also sets them up for a bigger disappointment should he fail to deliver.
Almost a year after Draghi pledged to support the euro-area recovery with low interest rates, the central bank is faced with mediocre economic growth and inflation at less than half its goal. That’s increased the odds policy makers will step up their response with radical measures that could range from negative deposit rates to asset purchases.
“Draghi clearly pre-committed,” said Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands. “As any other central banker should know, he would risk his reputation, and a significant strengthening of the euro, if the ECB doesn’t follow through in June.”
In the Bloomberg survey, 47 of the 52 respondents said the ECB will ease policy when the Governing Council meets on June 5 in Frankfurt. A record 88 percent said Draghi’s guidance on interest rates, made every month since July, has been effective. That’s up from 48 percent in September, when the question was first included in the survey.
Negative Rates
More than 60 percent said his comments after the May 8 meeting, when he said policy makers are “dissatisfied” with the inflation outlook and “comfortable with acting next time,” signaled intent.
“The times of ‘never pre-commitment’ on monetary policy actions are over,” said Duncan de Vries, an economist at Nibc Bank NV in The Hague. “The only thing the markets are uncertain about is what measures the ECB will take next month.”
Of the 47 economists who predicted action, 29 forecast a simultaneous cut in the benchmark rate, currently at 0.25 percent, and the deposit rate, which is at zero. That would make the ECB the first major central bank to charge banks for parking excess cash with it overnight. Denmark ended its experiment with negative rates last month.
In a separate survey published last week, the median estimate of 39 economists was for the ECB to cut the benchmark rate by 10 basis points to 0.15 percent. ECB Chief Economist Peter Praet will recommend a cut of that magnitude and a deposit rate of minus 0.1 percent, Der Spiegel reported yesterday without citing anyone.
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Euro-Zone Construction Sector Weakens
Construction across the 18 countries that share the euro fell in March, adding to other indications that the currency area's economy ended the first quarter on a weak footing.
The European Union's statistics agency Monday said construction was down 0.6% from February, but was up 5.2% from the same month last year.
During the first quarter as a whole, construction grew by 2.3% from the final three months of last year. But the decline as that quarter came to an end is a worrying development for euro-zone policy makers, since previously released data showed that industrial production and exports also dropped during March.
Eurostat on Thursday said the euro zone's economy grew at an annualized rate of 0.8% in the first quarter, unchanged from the last quarter of 2013, and a weaker outcome than had been expected.
The decline in construction was particularly large in Germany, the euro zone's largest economy, although January and February had been strong months, reflecting a very mild winter.
The European Central Bank had expected to see a slow and gradual pickup in the rate of growth during 2014. But policy makers have become concerned that growth won't be enough to push the annual rate of inflation appreciably higher.
Earlier this month, ECB President Mario Draghi said the governing council was prepared to provide additional stimulus when it next meets in early June, subject to new forecasts that will be provided by the central bank's economists. That message has been underlined by other members of the governing council in subsequent speeches.
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ECB’s Mersch: The likelihood the ECB will act next month has grown substantially
There’s goes today’s euro gains
Governing council unanimous in it’s willingness to deploy conventional and unconventional measures to effectively counter risks of very low inflation over a prolonged period
Sees no signs of deflation taking hold in eurozone but should at least be prepared for residual risks of deflation
Germany's GDP Growth To Ease In Q2: Bundesbank
Germany's economic growth will slow in months ahead after mild weather boosted expansion in the first quarter, Bundesbank said in its monthly report on Monday.
The economic upturn will be driven by domestic growth in the second quarter, while contribution from abroad will be moderate, the bank noted.
Further, it noted that the potential for external disruptions increased significantly due to the greater perception of economic risks in emerging markets and significant geopolitical uncertainties in eastern Europe.
Official data showed that the quarterly growth doubled to 0.8 percent in the first quarter from 0.4 percent in the previous quarter. This was the biggest increase since the first quarter of 2011.
ECB's Mersch says chances for June action have grown substantially
There were increasing signs on Monday that the European Central Bank will add more stimulus to the euro zone economy at its June policy meeting as inflation remains stuck at very low levels.
ECB Executive Board member Yves Mersch said the likelihood of policy action at the bank's next meeting had grown substantially, warning about the risks of inflation staying very low for too long, even though there were no signs of deflation.
President Mario Draghi said after the ECB's May meeting that the Governing Council was "comfortable with acting next time" - its June 5 policy meeting - but wanted to see updated economic projections from the bank's staff first.
Since then, data has confirmed a slight increase in euro zone inflation in April to 0.7 percent, from 0.5 percent the previous month, but also shown that the economy grew much less than expected at the start of the year.
"The likelihood that the Governing Council will already act at its next monetary policy meeting in June has grown substantially," Mersch said in the text of a speech for delivery in Munich.
He said the Governing Council was unanimous in its willingness to deploy both conventional and unconventional measures to effectively counter the risks of very low inflation over a longer period of time.
A too-long period of very low inflation risked unanchoring long-term inflation expectations, Mersch said.
He described various deflationary risks, and added: "We see no sign at the moment that such a deflationary scenario will materialize in the euro zone."
ONE-DIMENSIONAL VIEW
Jens Weidmann, head of the German Bundesbank and who leads the hawkish camp on the ECB Governing Council, said inflation would stay low for some time and policymakers would pay close attention to the euro's exchange rate in this context when taking policy decisions.
But he warned against taking too one-dimensional a view of the euro's strength, stressing the importance of the stimulative effect of lower sovereign bond yields in the euro zone.
Investors' renewed appetite for euro zone sovereign bonds could contribute to an appreciation of the euro but the lower yields should have an expansionary effect on financing over the medium term, Weidmann said in a speech in Frankfurt.
"It would therefore be too short-sighted only to take a one-dimensional view of the exchange rate and to leave out the stimulating effects of lower sovereign bond yields," he said.
Last week, Reuters reported that the ECB is preparing a package of policy options for the June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.
The ECB has faced pressure from the French government to change monetary policy course to weaken the euro, whose strength poses risks to euro zone exports.
Weidmann, referring to demands for the ECB to tackle the euro's exchange rate, said: "In order to strengthen growth and employment in the euro zone over time, member states must deliver competitive economic structures."
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