Forex Analysis
by ForexNewsNow Team on February 19th, 2011

EUR/USD Outlook for Week of February 21st – 25th

NEW YORK (Forex News Now) – EURUSD rallied last week after initially weakening according to the daily forex news. The Euro appreciated against the Greenback after a higher than expected German PPI number despite otherwise mostly negative numbers out of the Eurozone and somewhat mixed economic data seen out of the United States.

The week began on a soft note for the rate after ECOFIN ministers agreed to increase the European permanent emergency funding mechanism to €500B. The new fund, to be set up by 2013, will be funded with twice the current amount and will be called the “European Stability Mechanism” or ESM.

Furthermore, USD news reported on the Greenback’s fall after the FOMC Meeting Minutes for the January meeting were released last Wednesday. At that policy meeting, the Fed had left rates unchanged at 0<0.25% and the asset purchase program at $600B, making good on the promise made by policymakers a while back to keep rates low for an “extended period of time”. While the minutes expressed increased confidence in the improvements seen in the U.S. economy, inflation was considered moderate. Nevertheless, some committee members were watchful, suggesting that, “other variables, such as current and expected rates of economic growth, could be useful indicators of inflation pressures.”

Additional fundamental EURUSD analysis shows that the Euro was supported by positive results from a Portuguese auction of Treasury bills on Wednesday. Nevertheless, negative results from a subsequent bond auction in Spain dragged the Euro down on Friday before the rate rallied sharply later in the New York trading session.

The sharp increase in the EURUSD rate on Friday was in part due to German PPI, which increased by +1.2% month on month that was double the expected rise of +0.6%. The steep Euro rally was also attributed to hawkish comments made by ECB board member Bini Smaghi, who told Bloomberg that the central bank may have to raise interest rates as global inflation pressures mounted.

Technical Outlook for EURUSD

EURUSD analysis of the pair’s price action last week shows that rate fell to its weekly low at 1.3426 last Monday, and then traded in a range between 1.3460 and 1.3587 before breaking out of the range to rally to a high of 1.3714 on Friday.

The rate seems poised to test the high of 1.3743 made on February 9th, after it sustained its weekly closing level over the key psychological 1.3500 level, despite having begun the week trading below that level.

In addition, the rate continues to trade significantly above its key 200-day moving average, which now comes in at the 1.3127 level. The indicator is now displaying an increasingly positive slope, yielding a more bullish medium term outlook for EURUSD. Furthermore, the rate’s 14-day RSI trended upward last week from a low of 47.7 and ended up at the 57.6 level on Friday — significantly above the neutral 50 level — that may mildly impede upside price action during the coming week.

Initial support for EURUSD shows at the 1.3544 level just above the key 1.3450/1.3530 support region around the key psychological 1.3500 level. Below that, support shows at the 1.3425 level and at 1.3350 ahead of additional psychological support seen around the 1.3000 level.

Resistance is seen initially at 1.3743 and 1.3861, and then at important psychological resistance seen at 1.4000. Above that, resistance shows up on the charts at 1.4158 and at 1.4220.

Top Economic Events to Watch for This Week

  1. German Ifo Business Climate – Out on Monday, the results of this important survey tends to impact the forex market considerably upon release. The number is the result of a survey of some 7,000 German businesses that rate the level of business conditions and expectations for the following six months. The market is expecting the number to come out at 110.3, which is unchanged from its last reading.
  2. German Preliminary CPI – A key indicator, and the earliest for European consumer inflation, the release of economic data, out on Friday, is conducted throughout the day, making it an all day event. The reason for this is because the six German states report their individual CPI numbers separately during the day. Consumer prices give the ECB indications of whether to raise interest rates to contain inflation, which generally strongly affects the direction of the currency. This month’s release is expected to be an increase of +0.5%.
  3. U.S. Core Durable Goods and Durable Goods Orders – Out on Thursday, these indicators generally adds considerable volatility to EURUSD upon release. Core Durable Goods Orders for January are expected to rise by +0.4%, with the previous number upwardly revised from +0.5% to +0.8%. Durable Goods Orders are expected to increase by +2.4%, with the previous number also upwardly revised from -2.5% to -2.3%.
  4. U.S. Existing Home Sales and New Home Sales– The housing industry has considerable economic importance, stimulating a number of different industries. Wednesday’s release of Existing Home Sales and Thursday’s release of New Home Sales will give further evidence of economic recovery. Existing Home Sales are expected to increase to 5.30M from 5.28M, while New Home Sales are expected to increase to 330K from 329K.
  5. U.S. Preliminary GDP – On Friday, the Bureau of Economic Analysis releases U.S. Preliminary GDP for the fourth quarter of 2010. This bellwether indicator measures the change in the value of all goods and services in the U.S. economy and its release strongly affects the forex market. Fourth quarter Preliminary GDP is expected to rise to +3.3% from +3.2% in the previous quarter.

Outlook Summary

A technical EURUSD analysis shows that the rate reversed its intermediate term down trend and is now trending higher. Nevertheless, EURUSD continues to encounter strong psychological resistance and selling interest at the 1.3900 level.

Overall, this coming week’s scenario argues for EURUSD testing the 1.3900 level, Furthermore, additional upside potential exists that could see the rate test the 1.4281 high made back in November of 2010, provided of course that the rate can hold above the psychological 1.3500 level.

With that in mind, purchasing an Out of the Money forex binary option strangle in EURUSD early in the week before any significant move occurs could be used to profit from a significant breakout move in either direction with a limited risk of loss.

By ForexNewsNow Team

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