EUR/USD – Trading the ZEW Economic Sentiment

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EUR/USD - Trading the ZEW Economic Sentiment

EUR/USD is trading at the crossroads ahead of a couple of ZEW Economic Sentiment data, most important of which for Germany and the Eurozone as a whole. Let’s take a look at the fundamental factors first.

German ZEW Economic Sentiment – Forecast: 18.2, Previous 27.1

German ZEW Economic Sentiment

(source: forexfactory.com)

Eurozone ZEW Economic Sentiment – Forecast: 41.3, Previous 48.1
EZ ZEW Economic Sentiment

(source: forexfactory.com)

The readings since 2010 for both of these data points show that sentiment has been positive since 2013, but looks to have made a downturn early this year. Readings have missed forecasts and have been trending down. This reflects the credit issues lingering in the Eurozone, slower growth seen in Q2, and the geopolitical tensions escalating in Q3.

The EUR/USD has been falling since the 1.3993 high made in May, which is also the current high on the year. As we began this week, EUR/USD still looks pressured in the 1H chart.

EUR/USD 1H Chart 8/12
eurusd 8/12 1h chart

(click to enlarge)

Here are some observations:

1) Price structure of the Monday (8/11) session has been corrective. It looks like a flag pattern.
2) The bullish momentum from Friday’s push looks lost as the 1H RSI dips below 40 at the start of the 8/12 Asian session.
3) Failure of price to push and stay above the 200-, 100-, and 50- simple moving averages (SMAs) is a sign that bulls are losing control.
4) However, the rising trendline from last week is still intact.
5) There is also a key support/resistance pivot at 1.3365.

Scenarios Around the ZEW Economic Sentiment data:

1) Now, a break below 1.3365 could be a bearish continuation signal. IF the ZEW comes in worse than expected, AND price indeed falls below 1.3365, we should look for a bearish outlook toward the 1.3340 area, then the 1.3295-1.33 lows from Nov. 2013. If there is a pullback after the break below 1.3365, there should be sellers in the 1.3390-1.34 area if this bearish scenario were to materialize.

2) Now, if the data is soft, and price dips below 1.3365, but you get a sharp rejection and price climbs quickly back up above 1.34, we are likely in a bullish correction scenario for the short-term, with upside toward the 1.3444 August high, and a key resistance.

3) If data is better than expected and you see an initial reaction push towards 1.3390-1.34 area but settle and fail to break by day’s close, we are likely to see further weakness toward the 1.3340 area.

4) If good data can push EUR/USD back above 1.34, there is a chance that EUR/USD has legs this week for a bullish correction toward the 1.3444 area. However, because this is consolidation mode, it might be prudent to wait for price to break above 1.34, then wait for a pullback to the 1.3390-1.34 area before confirming the bullish attempt.

Final word: We know EUR/USD has been bearish, but it looks due for a consolidation, or a short-term bullish correction. If ZEW economic data is soft, look for price to remain neutral-bearish. Strong data might pave the way for a more bullish consolidation with upside limited to 1.3444 for now. Basically, going with the prevailing bearish trend, we should have a more bearish bias, unless price is able to stay north of 1.34.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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