Eur/Usd is it ready?

EUR/USD fell for a second week in a row as the euro surrendered to a strengthening dollar and speculation that the ECB might act. Will Draghi send the euro even lower? Manufacturing and services PMI’s, Inflation data, and the ECB’s rate decision are the highlights of this week. Here is an outlook on the main events ahead and an updated technical analysis for EUR/USD.
Draghi reiterated ,in a speech in Paris, that the ECB’s monetary policy would remain accommodative and that the bank is ready to act in order to bail out the European economy from its long lasting recession. The measures include facilitating excessive labor market regulations which led to an increase in youth unemployment. In the US, the downgrade of growth figures for Q1 and the effort of Fed officials to downplay tapering expectations did little to curb the dollar’s strength. As long as the economy keeps growing, tapering plans remain in place and this is certainly dollar supportive.

Updates:

• Manufacturing PMIs from Spain, Italy and the Eurozone all showed improvement and beat their estimates.
• Italian Monthly Unemployment Rate edged higher, from 12.1% to 12.2%.
• Eurozone CPI Flash Estimate gained 1.6%, matching the forecast.
• Eurozone Unemployment Rate improved, dropping to 12.1% from 12.3%.
• Spanish Unemployment Change dropped sharply by 127.2 thousand, well below the forecast of -83.5 thousand. However, this could be a seasonal drop.
• Eurozone PPI declined 0.3%, missing the estimate of -0.2%.
• Euro Services PMIs will be released on Wednesday.
• EUR/USD is losing ground as the pairs tests the 1.30 line.
• EUR/USD makes a convincing fall below 1.30 on the crisis in Portugal: the government in Portugal is very unstable after a streak of resignations. The bailout program is in danger at bad timing for the continent.
• EUR/USD managed to recover and climb above 1.2960. Better than expected job gains in the US didn’t stop the recovery. It trades at around 1.2980. 1.30 provides resistance.

EUR/USD daily chart with support and resistance lines on it. Click to enlarge:

1. Manufacturing PMIs: Monday.  The Manufacturing sectors in Spain, Italy and the Euro-zone moved closer to stabilization in May, although the readings were still below the 50 point line, indicating contraction. Spanish manufacturing activity shrank at a slower pace, reaching 48.1 in May from 44.7 in April. New orders edged up to 49.5 from 43 in April, however domestic demand remained sluggish. Italian Manufacturing PMI increased to 47.3 in May from 45.50 in April, beating market forecast of a 46.20 reading. The Euro-zone Manufacturing Purchasing Managers’ Index also edged up to 48.3 from April’s 46.7, higher than the 47.8 estimated. Overall, contraction in the EU area slowed down considerably in May giving hope for a modest recovery in the coming months. Spanish manufacturing sector is expected to climb to 48.9, Italy to 47.3 and the Euro-zone is expected to reach 48.7.
2. Italian Monthly Unemployment Rate: Monday, 8:00. Italian unemployment remained above 10% for the 15^th month in April, reaching 12%, worse than the 11.6 estimated by analysts. Italy’s new prime minister Enrico Letta, promised lawmakers that employment will be the “top priority” of his government.  Another increase to 12.1% is expected now.
3.  CPI Flash Estimate: Monday, 9:00. The annual inflation in the Euro-zone increased from 1.2 % to 1.4 % in May, in line with Eurostat’s flash estimate released two weeks earlier. For the 27-member European Union, which includes the euro-zone, annual inflation is at 1.6%, while month-to-month prices increased 0.1%.  A rise to 1.6% is anticipated.
4. Unemployment Rate: Monday, 9:00. Almost one in four is out of work in the 17 member states comprising the Eurozone. Unemployment rose to 12.2% in April, following 12.1% in March. Many blame the harsh austerity measures imposed by the ECB. Economists forecast further worsening before any improvement in the labor market. A further increase to 12.3% is expected this time.
5.  Spanish Unemployment Change: Tuesday, 7:00. Spanish unemployment is on a recovery path following May’s fantastic drop in the number of unemployed down of 98,265 from April. Hiring was stronger due to the coming summer holiday season. Another improvement is expected with a reduction of 83,500 unemployed.
6. PPI : Tuesday, 9:00.  Euro zone producer prices continued to decline in April contracting 0.6% after a 0.2% drop in the previous month. The fall was worse than expected. In a yearly base, PPI showed a 0.2% fall in April, after a 0.6% gain in the previous month. A smaller drop of 0.2% is expected.
7. Services PMIs: Wednesday. Mixed readings were released in May about the service sectors in Spain, Italy and the Euro-zone. Spain’s services sector increased to 47.3 from 44.4 in April, the slowest contraction since mid-2011, indicating Spain may finally step out of recession on its way to recovery. However Italy’s service sector continued to decline in May at a faster pace than in April falling to 46.5 from 47.0 in in the previous month and the Euro area service sector contracted to 47.2 from 47.5 in April, lower than the 47.5 estimated. Spain is expected to improve to 47.8, Italy to 47.1 and the Euro-Zone to 48.6.
8. Retail Sales: Wednesday, 9:00. Retail sales in the 17 countries that use the euro fell more-than-expected in April, declining for the third consecutive month, dropping 0.5% after a 0.2% fall in March. The decline was worse than the 0.2% drop projected by analysts. On a yearly base, retail sales dropped 1.1% in April from a year earlier, below expectations for a 0.8% decline, after falling 2.2% in March. A gain of 0.4% is anticipated.
9. Final GDP: Thursday, 9:00. The euro zone’s economic contraction slowed in the first three months of 2013, falling 0.2% after a 0.6% contraction in the last quarter of 2012. The reading was in line with market predictions. Overall, the Euro-zone remains weak despite encouraging signs suggesting recession halts in the Euro-zone. Consumers are still weak with limited purchasing power making recovery even harder. This will likely be confirmed now.
10. Rate decision: Thursday, 11:45, press conference at 12:30. The ECB isn’t expected to announce any change in policy in the upcoming meeting. In the previous one, it seemed that Draghi put the idea of a negative deposit rate on the backburner. However, the situation in the financial markets has dramatically changed since then: bond yields have risen and could bring the debt crisis back to the limelight. In the past, Draghi zigzagged between different moods between various meetings. After a positive and confident appearance last month, he could warn about the rising bond yields, growth prospects and falling inflation, given an impression that negative rates are more relevant once again and that the OMT is ready to be used soon. A worried Draghi could send the euro lower, while another confident appearance could help it.
11. German Factory Orders: Friday, 10:00. German factory orders plunged in April down 2.3% offsetting last month’s gain indicating Germany continues to struggle with recession in the Euro-zone. Economists expected a 1% drop. Nevertheless, German business confidence increased in May for the first time since February, indicating Germany is expected to grow in the coming months. Factory orders are expected to advance by 1.3% this time.