- The EUR/USD attempted a recovery but found itself on the back foot once again.
- US retail sales, EU GDP, and inflation from both battle for attention against Italy.
- The technical picture is quite bearish for the pair and so is the expert forecast for the upcoming week.
This was the week: Mid-Terms as expected, Italy, Brexit eyed
The EUR/USD hit a new high of 1.1500 but was unable to hold onto it. The failure resulted in a gradual drop to the bottom of the range.
The US Mid-Term elections yielded a divided government: Democrats won the House and Republicans retained the Senate, a result that had been forecast by the polls. Trump's policies have boosted the greenback in 2018, and the results initially sent it lower. However, the move was not sustained.
The Federal Reserve left the interest rate unchanged as expected and only made one noteworthy modification to the text, downgrading the assessment of business investment to "moderating." Despite the minor dovish tilt, the US Dollar gained. Fed Chair Jerome Powell and his colleagues did not deviate from the policy of gradually raising rates. The FOMC decision served as a reminder of monetary policy divergence. The Fed is raising interest rates in a determined manner while the European Central Bank and other central banks are moving very slowly.
At some point, the Fed will have to acknowledge the three worrying signs in the US economy. But for now, the hawks are in full control.
Italy: The Eurogroup meetings did not result in any breakthrough, but Economy Minister Giovanni Tria sounded constructive. Also in Italy, there are reports about a growing row between coalition partners: the 5-Star Movement and the League. The political situation in Italy somewhat weighed on the Euro.
Brexit: A flood of Brexit headlines sent contradicting messages. At the time of writing, the only certain conclusion is that most of the deal is agreed, but the Irish backstop issue is far from resolution. The Pound has become less sensitive to the news with the EUR/USD ignoring the headlines so far. However, things can change.
Euro-zone data has been improving, with small upticks in Markit's Services Purchasing Managers' Indices and the old continent's industrial Output. On the other hand, the European Union slightly downgraded growth forecasts.
Euro-zone events: Italian answers, GDP, and inflation
Italy is due to answer the European Commission by November 13th. So far, ministers have remained defiant on the EC's demand to cut the budget deficit. The answer will probably not satisfy Brussels If the deadline passes without a resolution, the Euro could suffer. Both sides may agree to talk and push back the period in a classic Euro-fudge.
Brexit negotiations will also be of interest. The Euro has responded to significant headlines on the topic, albeit at a far more limited extent than the Pound. A breakthrough may boost the Euro while fresh talk of a "no-deal Brexit" may weigh on the common currency.
The final German inflation data are published on Tuesday. They will probably confirm the highest annual inflation in a decade: 2.5% in the national CPI and 2.5% in the European standard HICP. Germany's ZEW institution publishes its Economic Sentiment gauge for November. The figure deteriorated to -24.7 points in September, reflecting growing pessimism.
According to the first GDP release for Q3, the euro-zone economies grew by only 0.2% QoQ, half the size seen beforehand. However, the data did not include the continent's largest economy: Germany. The German economy grew by 0.5% QoQ in Q2 and probably faced a slowdown in Q3. The figure for Germany will impact the revision for the GDP. Both figures are scheduled for Wednesday.
Final euro-zone inflation data are scheduled on Friday, and they will likely confirm the recovery of Core CPI to 1.1% and headline inflation at 2.1% in October.
Top economic events in the euro-zone, as seen in the FXStreet economic calendar:
US events: Inflation, Retail Sales, and politics
The day after the Mid-Term Elections already saw the firing of US Attorney General Jeff Sessions. This has political implications and markets are yet to respond. According to some US media outlets, Special Counsel Robert Mueller is expected to make announcements on the investigation into Russian meddling in the 2016 elections. Removing Sessions may make it easier for President Trump to remove Mueller. Revelations that may implicate the President may weigh on markets.
US traders enjoy a bank holiday on Monday. A light calendar on Tuesday features the Monthly Budget Statement. With Trump's tax cuts and fiscal spending, the US government's deficit has ballooned. It will be interesting to see if this trend continues.
Wednesday already sees a top-tier indicator. The Consumer Price Index (CPI) report is closely watched by the Fed and by markets. The most critical figure, Core CPI, stagnated at 2.2% YoY in September. The number for October is expected to be no different. However, the headline CPI, which includes energy and food, is projected to accelerate. Any deviation from early projections will likely rock the US Dollar.
The second highlight of the week awaits us on Thursday. Retail Sales were mixed in September with a meager increase of 0.1% on the headline, a disappointing drop of 0.1% in the core figure, but a robust rise of 0.5% in the all-important Retail Sales Control Group measure. All indicators are forecast to show healthy gains in October, with the Control Group set to have the most significant impact.
The last word fo the week belongs to America's Industrial Production, but this is unlikely to have a major influence on the USD.
Here are the top US events as they appear on the forex calendar:
EUR/USD Technical Analysis
The EUR/USD is trading within a downtrend channel (thick black lines on the chart) since mid-October. And there are additional bearish signs. The pair is situated well below the 50-day and the 200-day Simple Moving Averages. In addition, downside Momentum has intensified and the Relative Strength Index is pointing to the downside, without reaching oversold conditions (below 30). All in all, the picture is bearish.
1.1330 provided support in mid-October. 1.1300 is a critical line: a double bottom, 2018 low and also a round number of psychological importance. Further down, we are back to levels last seen in 2017. 1.1235 is a level detected by the Confluence Detector and it is closely followed by 1.1220 that capped the pair in the spring of 2017. 1.1100 is next down the line.
1.1370 provided support in early November. 1.1400 is a round line that also supported the pair around the same time. 1.1430 served as both support and resistance during October. 1.1455 was a high point in the wake of November. The round level of 1.1500 was the swing high on election night. Even higher, 1.1550 and 1.1620 were peaks.
The FXStreet forex poll of experts shows a bearish bias in the upcoming week but a bullish turn in the medium and long terms. The average forecasts have dropped to the downside on all three timeframes. extending the trend that began in the summer.
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