EUR/USD May 2 Euro Tumbles on Strong US PMI, Weak

The US dollar rebounded from its recent losses against the Euro, as Euro dollar dropped sharply following strong manufacturing data out of the US  coupled with weak  employment data from the  Euro-zone.  US Manufacturing PMI posted a reading of 54.8, a ten-month high, and  Manufacturing Prices  stayed steady  at 61.0, which was above the market forecast.  This morning’s Euro-zone employment figures are not looking  good, with  Geman and Italian unemployment numbers both  disappointing the markets. The Euro-zone unemployment rate,   which could have affected the direction of EUR/USD with an unexpected reading,  came in exactly as predicted by the markets, at 10.9%. Today’s key release is US Non-Farm Employment Change. The past two releases were weaker than predicted – will May bring better news?

Here’s an update on technicals, fundamentals and what’s going on in the markets.

EUR/USD Technicals

• Asian session: EUR/USD continued to move upwards, climbing to 1.3211 and consolidated at 1.3215. The pair  is down sharply  in the European session, trading at 1.3137.
• Current range: 1.3110 to 1.3165.

• Further levels in both directions: Below: 1.3110, 1.3050, 1.30, 1.2945, 1.2873, 1.2760, 1.2660 and 1.2623.
• Above: 1.3210, 1.33, 1.34, 1.3437, 1.3486, 1.3550 and 1.3615.
• 1.3165 is currently being tested by the pair on its sharp downswing today.
• 1.3110 is  the next level of  support, but could be tested  if  the pair continues  its rapid decline.

Euro/Dollar  drops sharply after weak Euro-zone employment releases  – click on the graph to enlarge.

EUR/USD Fundamentals

• 7:55 German Unemployment Change. Exp. -9K. Actual 19K.
• 8:00 Euro-zone Final Manufacturing PMI. Exp. 46.0. Actual 45.9.
• 8:00 Italian Monthly Unemployment Rate. Exp. 9.3%. Actual 9.8%.
• 9:00 Euro-zone Unemployment Rate. Exp. 10.9%. Actual 10.9%.
• 12:15 ADP Non-Farm Employment Change. Exp.178K.
• 14:00 US Factory Orders. Exp. -1.5%.
• 14:30 US Crude Oil Inventories. Exp. +2.3M.
• 16:30 FOMC Member  Lacker Speaks.

For more events later in the week, see the Euro to dollar forecast EUR/USD Sentiment

• US economy: strong Q1 but  mixed data  leaves room for  concern: All in all, Q1 was quite  healthy in the US, but the world’s no. 1 economy is showing signs of slowing down. Another US recession seems unlikely at this point, but the US isn’t the locomotive it once was. GDP for Q1 disappointed the markets, and the Chicago PMI sagged badly. However, manaufacturing data was strong, as Manufacturing PMI and Manufacturing Prices both beat the market forecasts. It will   be difficult for the dollar to make sustained headway against the euro if the markets  continue to see  a mixed bag of strong and weak data.
• Recession in Euro-zone Spreads: Spain is the latest member of a growing list of European economies now in recession, including the UK, Netherlands, Belgium, Ireland, Greece, Portugal, Italy, Denmark, the Czech Republic and Slovenia. Weak spending in France and lower confidence in Germany is sure to make matters worse.The deepening economic slowdown will likely have a negative impact on the euro.  As if  we needed any reminding of this, today’s disappointing employment figures out of Germany and Italy clearly brought home this point, as the  weak data sent the euro tumbling.  Urgent action is needed, but the slow and confusing response by the fiscal authorities to the recent debt crisis in Greece is not encouraging, to say the least.
• Markets unimpressed as Fed  maintains mixed message: Ben Bernanke didn’t rule out QE3, but as time passes by, this option seems quite unlikely, and even Bill Gross seems to back off his certainty that this move will come. A “hands off” policy of low interest rates for the foreseeable future is certainly not bullish for the dollar.
• Italy pays higher prices: A fresh auction for 10 year Italian bonds yielded higher yields once again, at 5.84%, higher than the secondary market that prices the bonds at a yield of 5.73% at the time of writing. Higher borrowing costs will only complicate attempts by the government to set its fiscal house in order. Although the situation is not as dire as that of Spain, further instability in the Euro-zone’s third largest economy could spell big trouble for the continent and the euro.
• Elections in Europe loom: Elections will be held in both France and Greece later this week. In France, Socialist challenger Francois Hollande will face President Nicholas Sarkozy in the presidential run-off after inconclusive results in the first round. Hollande is not considered pro-market, and there are predictions that EUR/USD could eventually plummet to 1.20 if the Socialists form the next government in France. In Greece, with its tottering economy, the voters may send the present government packing. Just to add to this mix, the Dutch government resigned over budgetary difficulties, and elections will be held shortly. The EU is worried, and rightly so.