EUR USD Weekly Forecast 27 June – 01 July 2016.

Britons decided to leave European Union, bringing another financial turmoil into markets. Another “black Friday” reached every financial asset on the market. But, the decision has been made and long term consequences are to be seen in future period. Full scale of negative impact cannot be estimated with accuracy at this moment, while it will also depend to some extent on split-negotiations between UK and EU that will start soon. Financial markets will need few days to calm down and reposition in line with new conditions while new economic forecasts for both UK and EU economies are to be made.

During her semiannual testimony to the US Senate, Fed Chair Yellen provided additional insight on current state of US economy and potential future movements in monetary policy. FOMC members are expecting inflation to grow to targeted 2% over “medium term”. She mentioned that there is slowdown in labor market and in this sense further cautious approach of FOMC members to raise interest rates would be appropriate. Drop in unemployment rate to 4.7% in May occurred due to lower number of people who actually reported that are seeking job actively, believing that current slowdown in employment is only “transitory”, considering increase in household spending. FOMC members are expecting further expansion in economic activity “at moderate pace” as well as further improvements in labor market.  She also mentioned that interest rates might be increased in case that inflation move above targeted 2%. Yellen also recognized in her testimony that Brexit might have “significant economic repercussions” noting also other external risks like China slowdown, and in this sense, Feds projections might not be reliable blueprint for future Fed actions. She did not exclude option of even decreasing Fed rate in future period, if necessary.  On the other side, Minneapolis Fed Chief Kashkari noted that Britons exit would have “moderate direct effect”, avoiding commenting on how many rate increases might be expected by Fed during this year. Considering new, changed picture in global markets from Friday, it would not be any surprise if Fed doesn’t act on rate increase  during this year.

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The currency pair EUR/USD finished week at level  1.1107.

FUNDAMENTALS WEEKLY UPDATE : 

Short review of major fundamentals released during previous week is following:

Monday, June 20, 2016 :

  • German Producer Prices: released data for May show modest increase of producer prices of 0.4% on a monthly basis, above market expectations at 0.3%. At the same time PPI reached -2.7% on a yearly basis, slightly better from -3.1% posted for previous month, and also better from -2.9% expected by market.
  • Euro Zone Construction Output: released data for April show further drop of construction industry output to -0.2% on a monthly basis, bringing yearly output to -0.4%, down from 0.5% posted for previous month.

Tuesday, June 21, 2016 :

  • German ZEW Survey: posted results for June show improved sentiment both for current situation and economic sentiment. Current situation index is modestly increased to 54.5 points from 53.1 previously posted, and above market estimate at 53.0. Economic sentiment, showing sentiment outlook for period of next six months has beaten expectations reaching 19.2 points, which is significant increase from 6.4 points posted during May and above market expectations at 4.8 points.

Wednesday, June 22, 2016 :

  • US MBA Mortgage Applications: data for reporting week of June 17th show modest increase in applications of 2.9%, increased from -2.4% posted for week before.
  • US House Price Index: released data for April show quite modest increase in house prices of 0.2% on a monthly basis, modestly below market consensus of 0.6%. During March, house prices were up by 0.7%.
  • Euro Zone Consumer Confidence dropped during June to -7.3 points from -7 previously posted and below market consensus at -7.
  • US Existing Home Sales reached 5.53m during May, modestly above 5.43m posted for previous month, but below market estimate at 5.55m. Existing home sales are increased by 1.8% in May, which is further increase from 1.3% posted previously.

Thursday, June 23, 2016 :

  • German Markit PMI: preliminary results for June show modest increase of Manufacturing sentiment to 54.4, better from market estimate of 52 and above previous month result of 52.1. This is quite optimistic for German manufacturing industry. At the same sentiment for services unexpectedly dropped to 53.3 from 55.2 posted for May, and below market consensus at 55. However, Markit composite index fell to 54.1 from 54.5 posted previously, indicating that growth might not reach expectations for second quarter.
  • Euro Zone Markit PMI: preliminary results for June show modest increase in manufacturing sentiment to 52.6 points from 51.5 posted previously and above market consensus at 51.4. PMI for services modestly decreased to 52.4 from 53.3 posted previously and below market consensus at 53.2. On the other side composite index fell to 52.8 from previous level of 53.1 indicating some slowdown in growth from expected during second quarter.
  • US Initial Jobless Claims unexpectedly fell to 259k during previous week, which is significant decrease from 277k posted previously and also below market consensus at 270k. Continuing claims reached 2142k, down from 2162k posted for week before and below market estimate at 2150k.
  • US Markit Manufacturing PMI: preliminary results for June show modest increase in sentiment to 51.4 points, up from 50.7 posted previously and above market consensus at 50.9.
  • US New Home Sales dropped during May to 551k or -6.0% on a monthly basis. Such move was expected considering significant growth of 16.6% m/m above every expectations in April. May drop was below market estimate of -9.5%.
  • US Leading Indicators: released data for May show drop in US economic activity by -0.2%, significantly below 0.6% posted for previous month and market expectation at 0.1%.

Friday, June 24, 2016 :

  • German IFO Index: released data for June show improved sentiment for German business outlook. Business climate sentiment is increased to 108.7 from 107.7 posted previously. Current assessment reached 114.5, from 114.2 released for previous month, while expectations are increased to 103.1, from 101.6 during previous month.
  • US Durable Goods Orders: preliminary results for May show decrease in durables of -2.2%, down from 3.4% posted for previously month. Released figure is significantly below market consensus at -0.5%. Excluding transportation, durables are decreased by -0.3%, down from 0.5% posted previously.
  • University of Michigan Confidence: released final data for June show modestly decreased consumer sentiment to 93.5 points, down from 94.3 posted initially.

 

FORECAST FOR THE COMING WEEK

Below are some of the significant indicators from EUR/USD Economic Calendar to watch during next week:

Fundamentals 27Jun-01JulUS Goods Trade Balance: results for May will be released. US started this year with further increase in trade deficit reaching $-62.23b in January. However, during following months, trade deficit has been modestly decreased to $-57.53b during April. Current market expectations are on side of modest increase of deficit during May to $-59.0b.

US Gross Domestic Product: third estimate for first quarter will be released. Initial estimate of 0.5%q/q has been improved during second release, reaching 0.8%q/q. Market is estimating that final GDP figure for first quarter will reach 1.0%q/q. During last quarter of last year GDP was standing at 1.4%q/q.

German Consumer Price Index: preliminary results for June will be released. Although German CPI has been quite volatile on a monthly basis since the beginning of this year, released figures for May of 0.3%m/m followed with producer price index increase previously posted, are adding modest confidence that deflation trend might be soon reverted. Market is expecting further modest CPI increase during June of 0.2%. On a yearly basis, after drop of -0.1% in April, May CPI returned to positive side reaching 0.1%y/y. Market is estimating that June CPI will reach 0.3%y/y.

Euro Zone Consumer Price Index: June estimate will be released. Currently CPI in Euro Zone represents one of significant indicators to watch taking into account significant quantitative easing conducted by ECB to cope with deflation trend. During May Euro Zone CPI was standing at -0.1% on a yearly basis, while market estimates that it would reach 0.0% in June. Although ECB members noted during monetary policy meeting that there is possibility for CPI to modestly drop during first half of the year and catch up in second half, taking into account Britain`s decision to exit, it`s to be seen if ECB`s forecasts will be changed considering new situation.

US institute for Supply Management Manufacturing PMI: results for June will be posted, showing sentiment for US manufacturing industry. During May index reached level of 51.3, while market consensus is currently standing at 51.2 for June.

Euro Zone Unemployment: results for May will be posted. Since the beginning of this year quite modest decreasing unemployment trend is evident, reaching 10.2% in April. Market is expecting further slow decrease to 10.1% in May.

Update on released results on a daily basis you can follow-up on Euro Dollar News and EUR/USD Economic Calendar.

 

EUR/USD Technical Analysis

Global market turmoil unleashed after Britons vote to leave EU decreased value of euro to level of 1.09 against dollar, after which currency pair returned to levels around 1.11, finishing week at level of 1.1107. Whether this level is final equilibrium for currency pair will be tested during next week. Level of 1.11 did not confirm to be significant level during previous trading sessions over couple of last years, and in this sense it might be seen as quite short term trading levels.

Next significant resistance levels, from current 1.11, can be found at 1.113, 1.12, 1.1240 up to 1.1390 as short term resistances.

On the opposite side, next support levels are at 1.105, 1.096 witch currency pair tested on Friday, down to 1.082 which is long term support level.

Relative Strength Index over 14-day period is currently moving around 40, without clear indication on trend reversal.

 EUR/USD Chart :

Chart 27Jun-01JulCheck also Euro Dollar History Graph.

 

For next week I am more on bearish side of EUR/USD

Britain’s vote to leave had expected initial repercussions on world financial scene. After initial shock on Friday, markets will find new equilibrium during next week or maybe next several weeks. Uncertainty is currently major driver. Old forecasts and predictions are not accurate any more, while new are to be made based on data which nobody can predict with certainty at this moment. In my Brexit-case scenario, negative effects will mostly fall on UK economy. Euro Zone economy will feel some consequences during time, but not at some too severe extent.

On the other side, Fed Chair Yellen testimony to Congress provided some insights on next Fed steps. US economy is growing at moderate pace, but there are still risks that might put contraction on future growth. Inflation and labor market are to be closely watched considering that based on their developments next Fed move is to be expected, whether on side of increase or decrease of interest rates. Considering British referendum outcome, I am almost sure that July will not be month for next rate hike.

Taking into account above mentioned and EUR/USD move from Friday, currently there is space for currency pair to test again level of 1.09. In case that this level is not breached, then currency pair will most probably revert back to levels around 1.12.

 

Do you want to know what investment banks think of the EUR / USD? Check out the Euro to Dollar Forecast

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