EUR/USD Aug. 8 Losing Ground as Markets Await ECB Action

EUR/USD was  down from yesterday’s (Aug. 7) levels, as the markets  wait to see if the  ECB  takes action. In particular, there is growing pressure on the central bank  to take steps  to cut borrowing costs in Spain and Italy.  After yesterday’s weak German Factory Orders, German Industrial Production was a disappointment, falling below the market forecast. There was some goods news out of Germany, as Trade Balance was well above the estimate.

Here’s an update about technical lines, fundamental indicators and sentiment regarding EUR/USD.

EUR/USD Technical

• Asian session: Euro/dollar dropped to 1.2377, before consolidating at 1.2387. The pair is down slightly in the European session.
• Current range: 1.2360 to 1.24.

Further levels in both directions:    

• Below: 1.2360, 1.2330, 1.2288, 1.22, 1.2144, 1.2043, 1.20, 1.1876 and 1.17.
• Above: 1.24, 1.2440, 1.2520, 1.2623, 1.2670, 1.2743 and 1.2814.
• 1.24 has strengthened as a resistance line.
• 1.2360 is being tested, with 1.2330 the next line of support.

Euro/Dollar  lower on ECB  uncertainty  – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00 German Trade Balance. Exp. 14.9B. Actual 16.2B.
• 6:45  French Trade Balance. Exp. -5.1B. Actual -6.0B.
• 10:00 German Industrial Production. Exp. -0.8%. Actual 0.9%.
• Tentative: German 10-year Bond Auction. Actual 1.42%.
• 12:30 US Preliminary Nonfarm Productivity. Exp. 1.5%.
• 12:30 US Preliminary Unit Labor Costs. Exp. 0.5%.
• 14:30 US Crude Oil Inventories. Exp. -0.6M.
• 17:00 US 10-year Bond Auction.

EUR/USD Sentiment

• Will ECB take action?: ECB head Mario Draghi recently declared that he will do “everything” to preserve the euro, but the markets are expecting concrete steps and not just tough talk, especially regarding Spanish and Italian bond buys. Draghi declared that bond yields are unacceptable, and that the ECB will explore ways to act in the coming weeks. These bond buys would be limited to the short end of the curve, but could be unsterilized – full QE. This is a significant move forward. Opposition came only from Germany, and not from other northern countries. Apart from the exploration, the actions also depend on a formal aid request. After many weeks of denial, Spain’s leader changed the tone and said he wanted to see what the ECB has to offer. He practically opened the door for an aid request.  The Euro-zone major players will have to  quickly get  their act together and put aside  differences  in order to effectively tackle the debt crisis.  
• Troika reports progress in Greek talks: The EU / ECB / IMF delegation left Athens and said they were making progress in their negotiations with the Greek government. Talks are not scheduled to resume until September, after Greece has a scheduled bond repayment to the ECB. It is unclear where it will get the money from. In a personal vote of no-confidence, the former head of ATEbank, Theodoros Pantalakis, moved 8 million euros abroad. While the move is probably legal, it certainly has raised eyebrows. There is again growing talk in Europe  of a Grexit, and the  likelihood of this  happening before the end of 2012 are rising.  Meanwhile, Standard and Poor’s  lowered its  outlook for Greece from stable to negative, and warned that  the country  was likely to miss the targets  set out in the bailout package, which would increase the  possibility  of a default.
• US surpises with strong employment data: After a long period of mixed data, the gain of 163K jobs  in the US was great news. However, this may have been a one time event. Also, the Unemployment Rate inched up to 8.3%, from 8.2%. More positive data is needed from the US, but better job numbers is certainly a step forward.
• No help from Fed:  The Federal Reserve refrained from implementing fresh easing measures, despite troubling data from the US economy. The Fed took note that economic growth was stagnant in 2012, and reiterated that it stood ready to act if necessary. This is a repeat of what Bernanke said in the past, and the change of wording is subtle. Talk of QE continues,  as some participants see easing coming in December, while others see it even sooner. On Tuesday, Boston Federal Reserve President Eric Rosengren declared that the Fed should implement QE3  in  order to  help the troubled US economy. Other market players, however, believe that the QE3 camp seems to miss a simple reality.
• Has Germany caught the Euro-zone flu?: Recent German economic data has been weak, with PMIs, retail sales and  manufacturing orders  all disappointing the markets. The markets are clearly getting nervous, as a Germany in decline could spell disaster for the struggling Euro-zone and send the euro tumbling. Just to add oil to the fire, Moody’s recently reduced the outlook on Germany, the Netherlands and Luxembourg from stable to negative.
• Spanish regions complicate bailout picture: The euro-zone’s fourth largest economy is trying to focus the crisis on the banks, but its regions are also in deep trouble. No less than 6 regions may ask to tap into the national bailout fund. National sentiment is strongly felt in Catalonia, which banned a budget meeting. The regions are part of the complex picture. Currently, optimism from Draghi has pushed yields lower: 6.77% on the 10 year bonds. This is welcome news, as recent yields were above the dangerous 7% level.
• Italy  struggling with  debt woes, recession: Doubts about Draghi’s seriousness can be seen in his own country. The area’s third largest economy raised money in the markets with a yield of 5.96%, higher than 5.82% seen last time. The specter of early elections in which the anti-euro sentiment will gain traction also weighs on Italy, which now has a debt-to-GDP ratio of 123%, and with another GDP decline, has  officially  been in recession for one full year. Meanwhile, Italian Prime Minister Mario Monti has warned that the disagreements among Euro-zone members are hampering an effective response to the debt crisis and threaten the stability of the EU. The rhetoric  between the Italian PM and German officials over what steps to take to tackle the debt crisis seems to be heating up.