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Euro dollar  is trading a big higher in a very limited range. All eyes are on the ECB rate decision. Mario Draghi is widely expected to cut the rates to 1%, but this isn’t 100% certain, and there are quite a few other policy options that could be introduced. This is a very busy day before the critical EU Summit.

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

EUR/USD Technicals

  • Asian session: Very quiet session saw the pair trading mostly between 1.34 and 1.3420.
  • Current range:  1.3360 – 1.3420EUR/USD Chart December 8 2011
  • Further levels in both directions: Below 1.3360, 1.3320, 1.3250, 1.3145. 1.30 and 1.2873.
  • Above:    1.3420,  1.3480, 1.3550, 1.3650, 1.3725 and 1.38.
  • 1.3360 is weakening after a first attempt to break lower. 1.3250 is the next critical line.
  • 1.3550 is strong support above, on a decisive move above 1.3420.

Euro/Dollar tense in range- click on the graph to enlarge.

EUR/USD Fundamentals

  • 6:30  French Final Non-Farm Payrolls. Exp. +0.2%. Actual 0%.
  • 12:45 Euro-zone rate decision: a cut from 1.25% to 1% is expected, although a bigger cut has also been discussed.
  • 13:30 ECB Press Conference. ECB President could present easier collateral rules for banks, longer borrowing and perhaps more. See the ECB Preview for more, and stay tuned for a live blog of the event.
  • 13:30 US Unemployment Claims. Exp. 397K.
  • 15:00 US  Wholesale Inventories. Exp. +0.4%.
  • 17:00 Euro-zone Bank Stress Test Results. There is a big gap between the results and reality, so the press conference will likely take over.

* All times are GMT.

For more events later in the week, see the Euro to dollar forecast

EUR/USD Sentiment

  • ECB will do a lot but not enough: A cut of 0.25% basis points will be a full reverse of previous policy, despite rising inflation. A cut of 0.50% is also possible, although the chances are small. Easing collateral rules for banks will certainly help banks. The recent coordinated central banks action and the ECB dollar auction showed their stress. So will lengthening the unlimited “full allotment” loans that the ECB will give. The big question is QE, that can really save the day. We could get hints in the press conference, although this might wait for the important meeting later in the day (see below).
  • ECB Closer to QE?:  A report  that surfaced over the weekend discusses conditions under which the European Central Bank will provide (or print) a giant sum of one trillion euros, to lower the yields of Spain and Italy, allowing them sustainable funding. Stronger budget rules and strict enforcement are discussed. This can be the ultimate weapon to fight the debt crisis, but  may weaken the euro as well. In the meantime, Italian and Spanish yields continue falling, and this certainly provides relief for the euro.
  • EU Summit begins early: The  leaders of France of Germany announced an agreement for tighter budget rules. The  announcement lacked details, especially on utilizing the ECB and also on the situation in Italy. This agreement will be discussed in the EU Summit on Friday, and also today, as French and German leaders meet Mario Draghi and other EU officials. .
  • Greeks withdraw money: The pace of withdrawals from Greek banks intensified recently, as the chances of leaving the euro-zone rose. This Greek bank run could bring down the system.
  • Everyone is warned: In a move that shocked markets, credit rating agency Standard and Poor’s  warned all euro-zone countries, apart from Greece, that their rating is endangered. Some countries, such as Germany, got a warning about a one-notch downgrade, while  France, Italy, Spain and others received a two-notch warning. The decision on a downgrade depends on the result of the summit on Friday. The move certainly looks as a political move to put pressure on the leaders before the summit.
  • Italian plan convincing markets, not unions: Italy’s Prime Minister, Mario Monti, presented a  plan to balance Italy and reassure markets. Success of these measures as Europe enters a recession is doubted, as well as the ability to pass everything through parliament. The new taxes aren’t popular with unions, who plan a strike, and not with Berlusconi’s party.
  • Not all US figures are positive: In recent weeks, most US figures have been positive. This is also reflected in the all-important job data. The US continues to gain jobs at a nice pace, with the unemployment rate falling to 8.6%. On the other hand, the services PMI dropped and also factory orders fell. This is somewhat disappointing, although US PMIs still reflect growth. Today’s weekly jobless claims will provide more job data, but unless they are completely out of line, they will be overshadowed by Draghi.