EURUSD Weekly Outlook: The Bullish, Bearish, And Likely Drivers

Here’s a quick overview of what’s likely to move the EURUSD for the coming week,  and why.

Risk Asset Markets Overbought: Bearish

As noted in our recent articles here and here, risk assets in general are at decade highs, and the EURUSD is at 8 month highs, despite a lack of fundamentals to justify a move higher, as discussed in detail in these posts.

The one big fundamental in the favor of risk assets in general has been the massive intervention by the Fed, ECB, BoJ, PBOC, etc to prop up asset prices.

So it’s reasonable to assume the party for risk assets in general can continue, and for the OMT supported EUR, right?

While the EURUSD rally may yet have some upside, there’s a reason to believe the pair is due for a pullback.

The bellwether S&P 500, along with other major global risk barometers, is very close to hitting resistance around 1550 that has only been hit twice in the past decade, in the summers of 2000 and 2007, and held both times. In both cases, the supporting fundamentals were far better. None of the primary market threats of today even existed then. There was no Great Recession, no global recession, no EU or US debt crisis and contagion risk. The developed world was overloaded with sovereign and private sector debt, and the BRICS were in the early stages of their growth spurt.

US DEBT CEILING AND FISCAL CLIFF WRANGLING: NEUTRAL/BULLISH

Given how markets have become accustomed to last-minute deals and brinkmanship, we don’t expect markets to get too rattled by signs of deadlock with well over a month to go before the US exhausts temporary measures and hits the debt ceiling, so downside risk to the pair from Washington is limited. However any positive surprise, albeit unlikely, could be bullish for risk assets and so send the pair higher.

BOJ POLICY MEETING: NEUTRAL

The JPY trades heavily with both the EUR and USD, so either an up or down move by the JPY should affect both the EUR and USD roughly to the same extent

EU EVENTS THIS WEEK

As we noted in our review of prior week market movers and their lessons for this week, calendar events have been drowned out by headlines on Japan’s coming new stimulus and US debt ceiling headlines. The EU events on tap this week that could move the pair up or down, include:

• Weekend German regional election results: Merkel & friends expected to do well – if not the implied uncertainty about her fate in September national elections could hurt risk appetite in general and EU assets in particular, especially the EUR.

• Monday EU finance minister’ meeting: There are 2-3 potentially market moving topics here

• Discussions on the Cyprus bailout. The result hinges on general desire to grant it and avoid contagion risk versus German demands that Cyprus take real steps to stop its banks (the ones getting bailed out because they hold Cyprus bonds) from aiding Russian mafia money laundering and German tax evasion. No conclusions expected at this time- so likely no effect on the EURUSD

• Use of ESM funds for direct bank recapitalizations. This is important for Spain and Ireland as it would provide some relieve their taxpayers of the full bank bailout burden. If markets see the EU moving towards using these funds for direct bank recapitalizations, that would likely support the pair.

2012 Q4 EARNINGS SEASON: Bearish

Thus far this has been mostly irrelevant for markets, with only occasional and temporary influence on US markets. However the coming week brings the start of a wave of European company announcements, so if the tone is positive it will be bullish for the pair. However slowing global and EU growth suggests the opposite result.

OTHER CALENDAR EVENTS

Events that might move the pair include:

Tuesday

German ZEW economic sentiment: A significant upside surprise supports the pair, and vice versa.

ECB President Draghi speech: relevant only if he provides some new insight into ECB policy, which isn’t expected.

US existing home sales: Bullish for the pair if it beats expectations and vice versa.

Wednesday

UK MPC meeting minutes – the UK is at risk of falling into a triple dip recession so markets will be eager to hear if the BOE has any policy changes coming. If the tone is pessimistic that’s bad for risk appetite and hence bearish (negative) for the pair.

Thursday

A batch of EU manufacturing and services PMIs –  they are second tier data but could be bullish for the pair if their overall tone is positive, and negative for the pair if they convey the opposite feel.

Friday

German Ifo business climate survey, UK prelim GDP, US new home sales. Obviously if these beat forecasts that feeds risk appetite and is bullish for the pair. If they miss, its bearish for the EURUSD.

CHARTS: RISK ASSETS, EURUSD BOTH SHOW STRONG ESTABLISHED MOMENUM: BULLISH

Regardless of fundamentals, however, we don’t fight trends, which thus far remain firmly bullish for risk assets in general and for the EURUSD in particular. As both the S&P 500 monthly chart and EURUSD weekly chart below show, both display entrenched multi- month momentum. See here for details.

The only cause for concern is that as noted above, and shown in the chart below, general risk appetite indicators like the S&P 500 index are about to hit decade-old resistance that repelled the advances of two bull markets, and so the EURUSD could get pulled down with a general normal technical correction.

S&P 500 MONTHLY CHART AUGUST 2000 – PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

02 jan 20 0636

However unlike the S&P 500, the EURUSD pair shown below is nowhere near its decade highs. While its ~6 month trend is bumping up against its 200 week EMA, that is only about 9 month old resistance.

EURUSD WEEKLY CHART MARCH 2010 – PRESENT

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

03 jan 20 0642

CONCLUSION

As we noted in our other posts for this week, while risk assets may have a bit more of room to rally, the odds favor at best a sideways move, if not an overdue, normal technical correction of up to 10-15%.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.