EUR/USD March 6 – Steady as Markets Eye ECB Announcement

EUR/USD is steady, as the pair continues to trade in the mid-1.30 range. The markets are keeping a close eye on the ECB, which will makes its interest rate announcement on Thursday.  Wednesday  is  quiet in terms of economic releases.  Eurozone Revised GDP declined by 0.6%, matching the estimate.  In the US, today’s major release is ADP Non-Farm Employment Change.

Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.

EUR/USD Technical

• Asian session: Euro/dollar edged upwards, touching a high of 1.3076, and then consolidated at 1.3056. The pair is unchanged in the European session.
• Current range: 1.3030 to 1.3100.

Further levels in both directions:  

• Below: 1.3030, 1.3000, 1.2960, 1.2880, 1.2805, 1.2746, 1.27 and 1.2660.
• Above: 1.3100, 1.3130, 1.3170, 1.3255, 1.3290, 1.3350, 1.34 and 1.3486.
• 1.3030  continues to provide  weak support, giving the round number of 1.30 a bit of breathing room.
• On the upside, the pair faces resistance at 1.3100. 1.3170 is a key line of resistance.

Euro/dollar  shows little change ahead of  ECB announcement  – click on the graph to enlarge.

EUR/USD Fundamentals

• 10:00 Eurozone Revised GDP. Exp. -0.6%. Actual -0.6%
• 13:15 ADP Non-Farm Employment Change. Exp. 172K
• 15:00 US Factory Orders. Exp. -2.2%
• 15:30 US Crude Oil Inventories. Exp. 0.9M
• 19:00 US Beige Book.

For more events and lines, see the Euro to dollar forecast

EUR/USD Sentiment

• ECB  meets for  rate decision: The ECB meets on Thursday to set its Minimum Bid Rate. Most analysts are expecting the central bank to maintain the current level of 0.75%. The rate has not budged since July 2012, so a cut in the rate would likely send shock waves through the financial markets. At the same, time, weak growth and unemployment figures out of the Eurozone could lead to interest rate cuts later this year. Since the expected interest rate is often priced in by the markets, it is often the accompanying press conference which is the highlight of the show (and the market-mover).  Mario Draghi’s optimistic  statements at  recent press conferences  have served to  boost the euro, and the markets will  be  listening closely on Thursday.
• Italian Crisis Deepens: The political stalemate in Italy shows no sign of abating anytime soon. Center-left leader Pier Luigi Bersani urged the leader of the 5-Star Movement, Beppe Grillo, to support a new government or agree to new elections. Grillo has refused to throw his support behind any other party, resulting in a political deadlock that threatens to paralyze the Eurozone’s third largest economy. Grillo, a former comedian, has not minced his disdain for the established political leaders, and called Bersani a “dead man walking”. The stalemate could force new elections in a country weary from a sluggish economy, a staggering debt and a dysfunctional electoral system.
• Grillo proposes referendum on euro:   Beppe Grillo, head of Italy’s Five Star Movement, was in the weekend headlines after suggesting that Italy hold a referendum on whether to remain in the Eurozone. Italy’s is staggering under a debt of two trillion euros, and Grillo has called for the country to renegotiate the debt. Grillo, who led his party to a stunning showing in the recent election, can now play kingmaker in any coalition talks, and his rhetoric attacking the euro and harsh spending cuts can no longer be dismissed. Many analysts believe that Grillo, who has risen to political prominence on a huge protest vote, would prefer returning to the polls rather than forming a coalition with the established parties.
• Spain asks for breathing room to reduce deficit: At a meeting of European finance ministers earlier this week, Spain asked for more time to reduce its budget deficit. Economy Minister Luis de Guindos said Spain had lowered its deficit and restored its credibility with international credit markets. He pointed to the fact that Spain has reduced its budget deficit from 9% of GDP in 2011 to under 7% in 2012. However, this still falls well short of the EU limit of 3%. Theoretically, the EU could halt aid to Spain due to its lack of compliance, but such a drastic step is very unlikely. The bloc wants to see Spain regain its financial footing, and some compromise will likely be reached.
• US faces another fiscal crisis: Remember the fiscal cliff crisis just a few months ago? This time the budget crisis is called “sequestration”, which saw $85 billion in automatic spending cuts kick in on Friday, as the Democrats and Republicans failed to reach agreement and were quick to point fingers at each other for the impasse. The core issues, spending cuts and tax reforms, continue to divide US lawmakers along party lines. Republicans want to take the axe to social programs such as Medicaide, while Democrats insists on tax hikes as part of any deficit reduction plan. The negotiations, and the mutual finger pointing of blame and bad will, are set to continue on Capitol Hill.
• Yellen support Fed stimulus package: Janet Yellen, vice-chair of the US Federal Reserve, threw her support behind the Fed’s current QE program and ultra-low interest rates. Yellen, the No. 2 figure at the Fed, said that she hoped that the low interest rates would facilitate a “return to prudent risk-taking”. The Fed’s current round of QE involves the purchase of $85 billion in assets each month, and critics have expressed the fear that this could lead to “asset bubbles”. However, both Fed Chair Bernanke and Yellen have stated that the benefits of a stronger recovery outweigh any such risks. Defending the Fed’s asset purchases, Yellen cited a study which found that when the central bank purchases $500 billion in bonds, unemployment drops a quarter of a percentage point within three years. Yellen’s remarks come on the heels of Beranke’s testimony on Capitol Hill, and underscore the Fed’s commitment to its current monetary policy.