Outlook for EUR/USD during the upcoming week

The euro declined against the US dollar on Friday, after recent upbeat US data reinforced speculation for further Fed tapering.

EUR/USD reached a session low at 1.3583 at 20:55 GMT, the pairs lowest since December 5th, after which it closed at 1.3589, losing 0.6% for the day. Support was likely to be received at December 5th low, 1.3544, while resistance was to be encountered at January 2nd high, 1.3775.

The Federal Reserve Bank said on December 18th that it plans to reduce its monthly bond purchases in January to $75 billion from $85 billion, while also reinforcing its position that the benchmark interest rate will remain low for an extended period of time. According to the median estimate of economists surveyed by Bloomberg on December 19th, the Federal Reserve may reduce the purchases in $10 billion increments over the next seven meetings, before ending the program, which tends to devalue the US currency, in December 2014.

However, Federal Reserve Bank Chairman Bernanke said yesterday that any decision to scale back the 75 billion USD in monthly asset purchases should not be interpreted as a signal that a tighter policy was on the horizon.

“It is important to recognize that the potential signaling aspect of asset purchases depends on the broader economic and policy context. In particular, the Fed’s decision to modestly reduce the pace of asset purchases at its December meeting did not indicate any diminution of its commitment to maintain a highly accommodative monetary policy for as long as needed”, Chairman Ben Bernanke said in prepared remarks of a statement he took at an economics conference in Philadelphia on Friday.

On Thursday the Department of Labor in the United States reported that the number of people, who filed for unemployment assistance during the week ended December 28th, dropped to 339 000 from the upwardly revised 341 000 in the preceding week. Analysts had projected that the number of initial jobless claims will increase to 342 000.

In addition, according to data by the Institute for Supply Management (ISM), US companies operating in the sector of manufacturing increased their activity at a weaker but still steady rate in December compared to November. The corresponding index, gauging the performance of manufacturing sector in the country, came in at a value of 57.0 in December, down from 57.3 in the previous month, which was also the highest level of the index in 2.5 years. Analysts had forecast that the manufacturing PMI will demonstrate a larger drop in December, to 56.9.

Meanwhile, a report by the Spanish Ministry of Labor, revealed on Friday that the number of unemployed people in the country fell by 107 570 in December, the biggest decline since June. The data defied analysts’ projections, which pointed to an increase of 24 300 in unemployment last month. In November the number of unemployed people in Spain decreased by mere 2 475 people. The report showed that the Spanish labor market started recovering, fueling optimism that the economy is gaining momentum.

On Thursday, the market research group, Markit Economics released a report that showed the Spanish Manufacturing PMI rose to 50.8 in December, beating analysts’ projections of 49.9 reading. In November the Manufacturing PMI stood at 48.6.

A separate report by the same market research group, showed the Italian manufacturing activity in December expanded at the fastest pace since April 2011. The Italian manufacturing PMI rose to a seasonally adjusted 53.3 in December from a reading of 51.4 in November. Analysts anticipated the index to rise to 51.8 in December.

The manufacturing activity in Germany, the euro zone largest economy, rose to a seasonally adjusted 54.3 in December from a reading of 54.2 in November. Analysts’ estimated the index to remain at 54.2 in December.

The euro zone manufacturing PMI remained unchanged in December with a reading of 52.7, in line with analysts’ forecasts.

EUR/USD cross may be influenced by a number of reports, scheduled for publication during next week, as follows:

On Monday (January 6th), France, Germany and the Euro zone will release reports on their final Services PMI for December, while the US will report its ISM Non-Manufacturing Composite index for the same month.

On Tuesday (January 7th), Germany will release a report on the unemployment change and the unemployment rate for December, accompanied by a Euro zone report on its Flash Harmonized Index of Consumer Prices. Meanwhile, US will release its Trade Balance for November.

On Wednesday, (January 8th), the Euro zone will publish a report on the unemployment change in the common area, as well as a report on the retail sales for November. The US will report the ADP Employment change and the FOMC will release its minutes from the policy meeting on December 18th.

On Thursday, (January 9th), the ECB will announce its interest rate decision, followed by comments from the Governor of ECB, Mario Draghi. Meanwhile, the US will release a report on the number of initial jobless claims for the week ended January 4th.

On Friday (January 10th), US will release a report the change in Non-Farm payrolls and the unemployment change for December.