Outlook for EUR/USD during the upcoming week

The euro advanced to a three-week high against the US dollar on Friday, as it remained supported by Thursday’s upbeat euro zone data, which showed the economic recovery in the euro area is gaining traction. Comments by the ECB President Mario Draghi at the World Economic Forum in Davos, Switzerland also supported the view that the recovery in the euro zone is strengthening.

EUR/USD reached a three-week high at 1.3738 at 11:38 GMT, after which it closed at 1.3677 on Friday, losing 0.14% for the day. The pair settled the week 1.0% higher, after it declined 0.95% in the previous 5-day period. Support was likely to be received at January 23rd low, 1.3529, while resistance was to be met at January 2nd high, 1.3775.

According to ECB President Mario Draghi there was a huge improvement in the recovery of euro zones economy and the inflation rate was expected to return to target, as he saw no risks of deflation in the euro area.

“What we have been seeing in the past three or four months is both the improvement in financial markets and that our accommodative monetary policy is finally being passed through to the real economy,” Draghi said on Friday at the World Economic Forum in Davos, Switzerland, cited by Bloomberg. He also added:“The idea is that now we have low inflation, and it will move gradually back to the objective,” which is just below 2%.

However, Draghi warned that there is still long way to go for the economic recovery as it ramains weak and fragile for now.

ECBs estimates that the economy in the euro zone will expand 1.1% in 2014, after it contracted 0.4% in the previous year. According to the central banks projections inflation will gradually advance from 1.1% this year to 1.3% in 2015.

The euro continued to draw support after on Thursday a series of upbeat reports showed higher-than-expected advance in the euro zone private sector, which boosted speculation the economic recovery in the euro area is gaining momentum.

Data showed the gauge of manufacturing output in the euro area increased to 53.9 in January, the highest in 2-1/2 years. According to the median analyst’ forecast the index should have increased to 53.0 from December’s reading of 52.7.

A separate report by Markit Economics, revealed its gauge of activity in the euro zone’s services sector advanced to 51.9 this month from 51.0 in the previous month. According to the median analyst’ estimate the index should have increased to 51.4.

Data on the same indicators also showed an improvement in the manufacturing output and services activity in Germany and France.

The gauge, which measures the output in the German manufacturing increased to 56.3 in January from 54.3 in the previous month. At the same time the gauge, which tracks the activity in the German services sector also advanced to 53.6 in January from 53.5 in the preceding month.

In addition, the gauge, which measures the output in French manufacturing also advanced to 48.8 in January from 47.0 in December. Moreover, the gauge, which tracks the activity in the French services sector rose to 48.8 in January from 47.0 in the preceding month.

Meanwhile, demand for the US dollar continued to be underpinned by a recent string of overall optimistic reports, which boosted the view of further cuts in Federal Reserve’s monetary stimulus.

The Bureau of Labor Statistics reported on Thursday that the number of initial jobless claims in the United States rose by 1 000 to 326 000 in the week ended January 18th, from a revised down number of 325 000 during the previous week. Analysts had expected that the people who filed for unemployment assistance will increase to 330 000.

A separate report said that existing home sales in the country increased 1.0% to the annualized 4.87 million units in December, following a three-month streak of declines. According to data by the National Association of Realtors (NAR), existing home sales reached a seven-year high in December 2013 compared to December 2012. During the whole 2013 sales increased to 5.09 million units, or a 9.1% gain in comparison to the whole 2012. Experts had anticipated that existing home sales will reach the annualized 4.93 million units in December. November’s result has been revised down to 4.82 million from 4.90 million previously.

The average home price in the country was 198 000 USD in December 2013, or a 9.9% increase in comparison with the same month a year ago, which came as a result of weaker supply.

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

On Monday (January 27th), the IFO Institute for Economic research will publish its German business climate index for January, while the US Census Bureau will report the number of new home sales in December.

On Tuesday (January 28th), the US will report the nations durable goods orders in December, accompanied by the consumer confidence for January, which is expected to increase to 78.9 from 78.1 in the previous month. Higher than expected readings will certainly support greenbacks demand.

On Wednesday (January 29th), the Federal Open Market Committee will announce its interest rate decision and the amount of monthly bond purchases, which are expected to be decreased by $10 billion to $65 billion from the current level of $75 billion.

On Thursday (January 30th), Germany will publish its preliminary consumer price index (CPI) and harmonized CPI for January, while the US Department of Labor will report the number of initial jobless claims for the week ended 25th January, whose figure is projected to reach 330 000 from 326 000 in the preceding week. A separate report will reveal the pace of the US GDP in the fourth quarter, projected to slow to 3.2% from 4.1% in the third quarter. Another report will show the number of pending US home sales in December.

On Friday (January 31st), the euro zone will release a report on its year-over-year harmonized index of consumer prices in January, which is projected to reach an annualized 0.9% pace from 0.8% in the previous month. A higher than expected reading will provide support to euros demand.