Outlook for EUR/USD cross during the upcoming week

The euro declined to a two-month low against the US dollar on Friday, after data revealed US housing starts decreased less than expected in December, marking the best year for the industry since 2007. The strong US data increased bets that the Federal reserve may scale back its stimulus program, which tends to devalue the US dollar, at the upcoming FOMCs meeting.

EUR/USD reached a session low at 1.3517 at 18:20 GMT, after which it closed at 1.3540 on Friday, losing 0.58% for the day. The pair settled the week 0.95% lower, after it added 0.6% in the previous 5-day period. Support was likely to be received at November 25th low, 1.3490, while resistance was to be met at January 16th high, 1.3650.

Fed President for Richmond Jeffrey Lacker said in a speech on Friday that the central bank may consider scaling back the pace of its bond-purchasing program at upcoming meetings, citing improvements in the labor market.

On Thursday, data by the US Department of Labor showed the number of initial jobless claims fell to 326 000 in the week ended January 11th, the weakest level since November. Analysts had expected the people who file for unemployment benefits will be 328 000, after they have been revised downwards to 328 000 from 330 000 in the previous week.

The greenback was slightly pressured on Friday, after the University of Michigan reported its preliminary index of consumer sentiment declined to 80.4 in January from 82.5 in the previous month, as households with low and medium income trimmed their financial expectations in early January.

However, the greenbackcs demand was supported, following a report by the US Commerce Department showed the housing starts decreased 9.8% to 999 000 annualized rate in December, after they have been revised to 1.11 million pace in the previous month, the strongest number since November 2007. Analysts had expected that the housing starts will decline to 985 000 in December. Building permits fell by 3% to a 986 000 pace.

Last year, builders began constructing 923 400 homes, which is 18.3% higher than a year ago and is the largest number since 2007, when 1.36 million houses were constructed.

At the same time, industrial production in the United States rose 0.3% in December on a monthly basis, in line with expectations, supported by overall recovery in manufacturing and mining sectors. On annual basis, industrial output expanded 3.7% in December, or 0.9% higher than the peak registered before recession. November’s result has been revised down to a 1.0% increase from 1.1% gain previously. In October and September, however, nation’s industrial production has been moderately revised up.

The reports provided support to greenback’s demand, as they favored the view that the Federal Reserve Bank may continue tapering during the year. Central bank’s policy makers said on December 18th that they will reduce monthly asset purchases to $75 billion from $85 billion, underscoring improving labor market conditions. The bank will probably continue to pare stimulus by $10 billion at each policy meeting before exiting the program in December, according to a Bloomberg News survey of 41 economists, conducted on January 10th. The Federal Open Market Committee is scheduled to meet next on January 28-29.

Meanwhile, the euro was pressured on Thursday after a report by Eurostat revealed the consumer price inflation in the euro zone rose by 0.3% in December, in line with analysts’ expectations and after a 0.1% drop in the preceding month. On year-over-year basis, the CPI increased by 0.8% in December, unchanged from November’s preliminary estimates and in line with analysts’ projections.

The data showed that the rate still remains well below ECB’s target of 2% rate of inflation.

The monthly bulletin of the ECB released on Thursday, largely reflected the statement by its President Mario Draghi, following central bank’s decision to lower interest rates in November. In its bulletin ECB reiterated that it will stick to monetary policy of low interest rates until it is needed. The central bank also expected interest rates to remain at these historically low levels for a prolonged period of time and the inflation rate to remain weak in the coming months.

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

On Monday (January 20th), no important reports are scheduled to be released out of the euro zone, while in the US markets will be closed, due to a holiday.

On Tuesday (January 21st), Germany and the euro zone will report their ZEW economic sentiment and current condition indexes, while US will not publish important reports.

On Wednesday (January 22nd), both the euro zone and the US will not release data on important economic indicators.

On Thursday (January 23rd), the euro zone will release advance PMI data in the services and manufacturing sectors, while the US will release the number of initial jobless claims for the week ended January 18th, accompanied by data on the number of existing home sales.

On Friday (January 24th), both the euro zone and the US will not release reports on important economic indicators.