EUR/USD: 1.3195Despite the better data out of Germany, where the IFO Business Climate Index expanded at a faster than expected rate of 107.4 (against exp of 105), the Euro slipped a little ahead of the Italian election, with the result due on Monday, and with the market concerned about the lack of any clear outcome to enable anyone to form a majority government. Also not helping the Euro on Friday were the LTRO repayment figures, which showed that EU Banks will repay only Eur 61.1 billion of the ECB's three-year loans next week instead of the Eur 130 bio that had been expected by the market. This is not a good sign and indicates that European banks are still overly dependent on the largesse of the ECB, and which is bound to keep the Euro under pressure.
Technically the Euro looks in some trouble. Having accelerated down below the neckline (blue) of the Head/Shoulders top last week, it appears headed for a test of the 100 DMA (brown) at 1.3110 and possibly to the Fibo support at 1.3075 (38.2% of 1.0242/1.3710). Before that, the base of the short term descending channel that we are currently trading in, is at 1.3130 and it could be that this holds in the short term. Although the daily indicators are heading into negative territory the 4 hour charts are oversold and so downside momentum should be slow and warns of potential short term bounces. The Euro is likely to receive some support on Monday from purchases of Eur/Gbp following the UK downgrade on Friday.
If we see a return to higher levels, sellers will arrive at Fridays 1.3245 high. Beyond there 1.3275 is 23.6% of the decline from 1.3710/1.3144, while 1.3296 is the H/S neckline and 1.3360 is currently the top of the descending channel. (This is not shown as it adds too much noise to the chart. See Fridays 4 hour chart to view the channel).
Until the Italian election results it would be best to retain a neutral stance, but a clear winner would see a decent bounce so keep stops tight. If the outcome fails to declare a clear winner, or if Berlusconi has a say in the outcome, then it could get ugly on the downside.
There is plenty of economic data out this week to keep us guessing, so take it one session at a time. The overall preference though is to use a potential short squeeze towards 1.3250/1.3300 to sell into, with an eventual view that the H/S target at 1.2840 will come into play. Above 1.3350 would need a reassessment.
Economic data highlights will include:
M: -
T: German Retail Sales, US Case Schiller Home Price Index, Consumer Confidence, New Home Sales, Richmond Fed Mfg Index, Bernanke testimony to US Banking Committee
W: German Consumer Confidence, EU Consumer Confidence, Business Confidence, US Durable Goods, Pending Home Sales
T: German Unemployment, EU CPI US GDP, Jobless Claims, Chicago PMI
F: NBS Official, HSBC China Mfg PMI, EU/US Mfg PMI (Feb), EU Unemployment Change, US CPI, Personal Spending, ISM Mfg PMI (Feb), Reuters/Michigan Consumer Sentiment Index (Feb)
