Outlook for EUR/USD during the upcoming week

The euro declined to a two-month low against the US dollar on Friday, as euro zone inflation data missed target, while at the same time greenbacks demand was fueled by a set of overall positive data.

EUR/USD reached a two-month low at 1.3480 at 15:45 GMT, after which it settled at 1.3489 on Friday, losing 0.49% for the day. The pair settled the week 1.4% lower, after it advanced 1% in the previous 5-day period. Support was likely to be received at November 22nd low, 1.3463, while resistance was to be met at January 30th high, 1.3662.

Eurostat reported on Friday that consumer prices in the euro area rose at an annualized pace of 0.7% in January, after a 0.8% increase in the previous month. Analysts had estimated that consumer prices will increase by 0.9% in January. This was a fourth straight reading of inflation under 1%, while the ECB tries to maintain inflation at just below 2%.

A separate report revealed that the inflation in the largest economy in the euro zone, Germany, unexpectedly remained steady at 1.2% in January, defying analysts projections of an increase to 1.3%. The low German inflation just added to evidence of weak price pressure in the 18-nation common currency area.

In November, the central bank unexpectedly cut its benchmark interest rate to a record-low 0.25%, after inflation in the euro area slowed its pace to 0.7%. The European Central Bank’s policy makers are scheduled to next meet on February 6th.

However, “The ECB is unlikely to move its policy rates” or add “further accommodation via non-standard measures” next week, according to Annalisa Piazza, a fixed-income strategist at Newedge Group in London, cited by Bloomberg.

The weak inflation rate in the euro zone was mainly driven by a 1.2% slump in energy prices, today’s report showed. Core consumer prices, which exclude volatile items such as energy, tobacco and alcohol, however, increased by 0.8% this month, after a 0.7% advance in December.

A separate report showed the unemployment rate in the euro area remained unchanged at 12% in December, after November’s reading was downward revised to 12% from earlier estimates of 12.1%. The unemployment rate eased a bit from September’s high of 12.1%.

Another bearish report pressured euro’s demand earlier in the week, as ECB said lending to companies and households contracted for a 20th consecutive month in December.

Meanwhile, according to data by Thomson Reuters in cooperation with the University of Michigan, released on Friday, their gauge of consumer confidence for the United States came in at a final reading of 81.2 in January, which outstripped experts’expectations pointing to a value of 81.0 and also the preliminary reading of 80.4, released on January 17th. The final value of the index of consumer sentiment stood at 82.5 in December.

The US Department of Commerce reported on Thursday that consumer spending rose by 3.3% in the fourth quarter, marking the highest advance in three years. The data was preliminary and it came after a 2% increase in the previous quarter, while analysts had expected consumer spending will rise 3.7% in Q4. Consumer spending is regarded as a key component of US Gross Domestic Product as it accounts for almost 70% of the economy.

A separate report by the US Bureau of Economic Analysis revealed the preliminary gross domestic product of the country increased 3.2% in the fourth quarter, in line with analysts’ forecasts. The US economy expanded at 4.1% in the prior three months, which was the fastest pace since the first quarter of 2010.

However, data also revealed the number of initial jobless claims for the week ended January 25th, rose by 19 000 to 348 000, exceeding analysts’ estimates of an increase to 330 000. The number of jobless claims in the previous week was upward revised to 329 000 from earlier estimates of 326 000.

Greenback’s demand continued to be supported after the Federal Open Market Committee announced on Wednesday that it will reduce the pace of its monthly bond purchases to $65 billion from the current $75 billion. The FOMC cited improvements in the labor market and the pace of the economic growth, which started accelerating in recent quarters, in consonance with its plan to gradually withdraw from bank’s unprecedented accommodative policy. The central bank has undertaken three rounds of bond purchases since 2008, known as quantitative-easing stimulus strategy.

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

On Monday (February 3rd), four of the largest euro area economies, Germany, France, Italy and Spain will release their PMI data, accompanied by a report on the PMI, which combines data from all the countries in the common currency area. Meanwhile, the US Institute for Supply Management will release its manufacturing index for January.

On Tuesday (February 4th), the US Census Bureau will report the factory orders in December, which are projected to advance 0.7%, down from Novembers 1.8% increase. Meanwhile, no important economic indicators are scheduled to be released out of the euro zone.

On Wednesday (February 5th), the euro zone will report data on retail sales for December, combined with the final reading of the services PMI for January. Meanwhile, the US Institute for Supply Management will release its services index for January, which is expected to advance to 53.9 from Decembers reading of 53.0. Another report by ADP will reveal the number of people that found work in the private US sector in January.

On Thursday (February 6th), the ECB will announce its interest rate decision, followed by a press conference of the ECB President Mario Draghi, regarding the monetary policy of the central bank. Meanwhile, the US will report on its trade balance in December, which is projected to deteriorate to $35.8 billion from Novembers $34.25 billion reading. A separate report will probably show that the number of initial jobless claims for the week ended February 1st, declined to 335 000, from 348 000 in the previous week.

On Friday (February 7th), the largest euro zone economy, Germany will report its pace of industrial production in December, while in the US data will show the change in non-farm payrolls in January, accompanied by a report on the unemployment rate, projected to remain steady at 6.7% in January.