Outlook for EUR/USD during the upcoming week

The euro advanced to one-week high against the US dollar on Friday, after a government report revealed US employment increased at a lower-than-expected pace in January.

EUR/USD reached a one-week high at 1.3642 at 13:30 GMT, after which it settled at 1.3635 on Friday, adding 0.32% for the day. The pair settled the week 1.1% higher, after it lost 1.4% in the previous 5-day period. Support was likely to be received at February 6th low, 1.3483, while resistance was to be met at January 30th high, 1.3662.

US economy outlook

The US dollar came under heavy selling pressure on Friday, after a report by the US Department of Labor revealed the non-farm payrolls in the country increased by 113 000 in January, well below experts’ forecasts of an increase to 180 000 and after US employers added 75 000 jobs a month ago, the smallest change since January 2011. Data showed that the small number of added jobs in January was driven by retailers and government agencies as they have cut payrolls at the fastest pace in more than a year, while at the same time construction companies and manufacturers boosted employment.

A separate report revealed the US unemployment fell to 6.6% in January, while analysts projected the jobless rate will remain steady at December’s rate of 6.7%. The data made it clear that the unemployment rate reached the weakest level since October 2008, even though more Americans entered the workforce.

The lower-than-expected number of non-farm payrolls in the previous month raised concerns over the uneven recovery of the US economy and fueled speculations that Fed may slow the pace of scaling back stimulus.

On Thursday, greenbacks demand was pressured, following a report by the US Bureau of Economic Analysis, which revealed that nation’s trade deficit widened to 38.7 billion USD in December from 34.25 billion USD during the preceding month. Analysts had forecast that the deficit figure will widen at a lesser pace to reach 36 billion USD.

However, the number of initial jobless claims in the United States came in at 331 000 during the week ended February 1st, down from 348 000 in the previous week and less than expectations of 335 000 more people, who filed for unemployment assistance.

Meanwhile, the euro was pressured earlier on Friday, after the German Federal Constitutional Court said it will ask the European Court of Justice to decide if the ECB overstepped its powers back in September 2012, when it announced the start of the Outright Monetary Transactions (OMT) bond-buying program. The program has not been used so far, but it was initially created with the intention to authorize the central bank to buy bonds of indebted euro zone countries. The OMT program is said to have helped in easing borrowing costs, which reached record-highs.

“It’s a clear euro negative if you’re questioning the whole legality of the existing framework of the OMT program,” said Carl Hammer, a currency strategist at SEB AB in Stockholm, cited by Bloomberg. “The program has had a material effect in lowering the risk premia in European assets, which had supported the euro.”

ECB decision

On Thursday, the ECB President Mario Draghi refrained from taking action to counter low inflation, but said that the central bank is ready to intervene as soon as March, when more euro zone data will be available.

“We are willing and we are ready to act,” Draghi said on Thursday in Frankfurt, cited by Bloomberg. His comments came after the ECB left its benchmark interest rate at a record-low 0.25%. He also added: “The reason for today’s decision not to act has really to do with the complexity of the situation that I described and the need to get more information.”

Draghi also reiterated the forward guidance of the central bank, that rates will be kept at their current record levels, or even weaker, for a prolonged period of time.

He tries to guide the euro zone through fragile economic recovery as inflation remains at the lowest since 2009. For now, interventions are postponed at least until next month, when the central bank is going to publish its quarterly macro-economic forecasts, which will provide first inflation prediction for 2016. Previous forecasts have revealed that the ECB should take more decisive steps and should further ease its monetary policy.

Euro area economy outlook

Inflation in the euro area sharply declined to an annualized pace of 0.7% in January, the weakest level in four years and 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%, which was referred to by ECB President Mario Draghi as a danger zone. The central bank attempts to maintain inflation at just below 2%, which added to concerns over the threat of deflation in the region.

Inflation in Germany, the largest economy in the euro bloc, unexpectedly remained steady at 1.2% in January, defying analysts projections of an increase to 1.3%. This data came as another evidence of weak price pressure in the 18-nation common currency area.

The low inflation rate in the euro zone was mainly driven by a 1.2% slump in energy prices, Friday’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.

The unemployment rate in the euro area remained unchanged at 12% in December, after November’s reading has been revised down to 12.0% from 12.1% previously. The unemployment rate eased a bit from September’s high of 12.1%.

However, some economic indicators showed improvement as German business confidence and euro-area manufacturing rose to the highest in more than two years. In addition, the euro zone composite output index advanced in January, and data showed the gain was mainly driven by growth in the manufacturing sector, where the increase in total new orders and new export business helped production to reach its highest level in almost three years.

Reports that may influence EUR/USD during the next week

On Monday (February 10th), SENTIX will publish its monthly investors confidence index for the euro zone, which is based on a survey among 2 400 investors. The index is expected to slow its pace to 10.1 in February, from 11.9 in the preceding month.

On Tuesday (February 11th), the separate statements of the Federal Reserve President for Philadelphia, Charles Plosser and the keenly-anticipated statement of the new Chair of the Board of Governors of the Federal Reserve, Janet Yellen, who succeeded Ben Bernanke and started her 4-year term on February 3rd.

On Wednesday (February 12th), the euro zone will report on its industrial output in December, after which the ECB President Mario Draghi will give a statement. Meanwhile, the US will give data on their Federal Budget Balance, whose figure is anticipated to reach a deficit of $28.5 billion in January, from a $53.22 billion surplus in the previous month.

On Thursday (February 13th), the European Central Bank is scheduled to publish its monthly bulletin, which as usual comes one week after the ECB interest rates decision and contains detailed analyses of the current economic situation in the 18-nation common currency area. Meanwhile, the US will release reports on the retail sales, the number of initial jobless claims for the week ended February 8, as well as a statement by Janet Yellen.

On Friday (February 14th), the largest euro zone economy, Germany, will report its Gross Domestic Product for the fourth quarter, which will be followed by a report on the Gross Domestic Product of all the countries in the euro area. Meanwhile, Thomson Reuters in cooperation with the University of Michigan will publish their consumer confidence index for February.