EUR/USD Weekly analysis: 11th to 15th March 2013

The week opened at 1.29950 and closed at 1.30740. The trend has been spread evenly between the bears and the bulls, with bulls dominating three out of the five days
Monday’s trade was dominated by bulls. The day opened at 1.2995 and closed at 1.3045. Data from last week indicated that the US economy had increased jobs by more than 200,000 with the retail sales increasing substantially. This combined with the development of the US energy sector pushed the dollar higher compared to most of the G10 currencies on Friday. However the bulls managed to pull the price back up from the overselling of the previous week (H1 EUR/USD chart).

The Euro rally did not last long though. Tuesday was bear dominated with the day opening at 1.3044 and closing at 1.3027. On Wednesday the Euro skidded to a 3 month low of 1.2923 and last stopped at 1.2962, little changed from late US trade, with bids from an Asian central bank giving it a temporal support. Support is seen at 1.2906 a level representing the 76.4% retracement of Nov/Feb rally.
However, Thursday turned out to be a somewhat bad day for bulls as the euro hit the lowest level this year at 1.29106 thus prompting 38.2 level for the monthly chart. This dollar rally might have been attributed to:

1.The data release indicating that the producer price index (YoY Feb) was below the expected level I.e. 1.7%
2.Although real money investors like pension funds have been participating in the stock rally for a while, only now are these investors beginning to actively buy the USD itself. This shift could provide significant support for the dollar.
3.Improving US economy, evident in the latest retail sales, jobless claims data and the recovering housing market. An improving economy can only encourage nervy questions about the markets long term dependency upon Federal reserve’s “punch bowl” or pro stimulus stance, however, not only has the Fed assured Fed funds rate will be going nowhere whilst unemployment remains above 6.5% but even the provided inflation expectations are under control, an FOMC led by Bernanke, Chairman federal reserve, will be reluctant to move too quickly.

The dollar rally was however short lived as the bulls managed to push the prices back up to close higher than the open. Germany announced to balance its budget sooner than expected showing its commitment to austerity. Other states however shun austerity thus may lead to Euro sell off some more. The Spanish solid demand for its long term bond auction may have provided support for the Euro bounce back.
The week closed bullish on Friday at 1.30740. This was after hitting a high of 1.31063, its highest since last Friday. The sudden strength of the Euro can be a result of the unexpected negative data on inflation for the US economy released Friday evening.


My take:
Generally the dollar outperformed particularly against those currencies where the central bank either has a weakening bias or is perceived to have a weakening bias.
Moreover, the European economies have continued to perform poorly. Though the imports and export data showed that Germany economy was improving, the Italian GDP continued to show poor performance from the euro zone’s third largest economy. However, the USD is not extending gains against the Euro, where the ECB is shrinking its balance sheet- despite Italian turmoil and French financial weakness.

Last week showed some really positive economic data for the US economy thus explaining the growing strength of the USD. However towards the end of this week economic data showed that the US economy might not have recovered that much. The consumer sentiment (University of Michigan statistics) unexpectedly plummeted in March; it’s lowest since December 2011. Separate data showed US consumer prices rose in Feb as the cost of gasoline surged, but there was a little sign of a broad pick up in inflation. The sentiment may also have been attributed to Americans growing dissatisfaction with the gridlock in Washington and skeptical about major improvements in the labor market or the overall economy. The dollar, which has started to trade in the same direction as stocks, took a hit, especially against the Euro.

In Europe leaders are finally starting to talk about prosperity and not austerity and if economic reports due next week are positive, we have reason to think that the Euro might bounce back. Euro gained on the prospect of EU leaders looking at short term ways of boosting faltering Euro zone economies. For instant, the auctioning of long term bonds by the Spanish government and the Portuguese receiving its next tranche of aid, and a one year extension on meeting its deadline for implementing spending cuts. Also there was the Brussels meeting to discuss Cyprus.

Dented economic data (US) has reinforced expectations the Fed will continue its bond-buying programme for the foreseeable future. The Fed meets next week, on Wednesday, and looks set to keep buying $85B a month in mortgages and treasury bonds in an effort to encourage investment. This programme is aimed at keeping long term interest rates low, eroding dollar’s yield appeal.

The Euro’s failure to break below 1.29 encouraged profit taking on dollar gains. Despite the strong chart support at the 200- daily moving average at 1.2969, the USD rally may have reached its highest for the time being. A survey by Morgan Stanley showed that investors would prefer that Italy avoids new elections; concerned they would just postpone economic reform and bring little hope on resolving a parliamentary deadlock. The election toll is clear from the stress in Italy’s bond market.
Assuming positive economic reports next week, the Euro may bounce back way past the 1.32 level. The USD strength may be easing off. Ceteris paribus, I would set a buy stop at 1.3200 with a stop loss at 1.3170 and a take profit at 1.32900, assuming a 1:3 risk/reward ratio.