EUR/USD Feb 7 – Markets Cautious Ahead of ECB Meeting

EUR/USD  has pushed higher and moved  into the mid-1.35 range, as the markets await the ECB  interest rate announcement  and comments from ECB head Mario  Draghi  later on Thursday.  The ECB is widely expected to maintain its benchmark interest rate at 0.75%.    The day started off on a weak note, as French Trade Balance dipped to a four-month low. The markets will be hoping for better news from German Industrial Production. Today’s highlight is US Unemployment Claims.

EUR/USD Technical

• Asian session: Euro/dollar touched a high of 1.3543, before consolidating at 1.3527. The pair has moved upwards in  the European session.
• Current range: 1.3480 to 1.3588.

Further levels in both directions:  

• Below: 1.3480, 1.34, 1.3360, 1.3290, 1.3255   and 1.3170, 1.3130, 1.3110, 1.3030, 1.30 and 1.2960.
• Above: 1.3588, 1.3690, 1.3740, and 1.3860, 1.3915 and 1.40.
• 1.3480  is providing strong support.
• 1.3588 is providing resistance.  This line could be tested  as the euro  is moving  higher.

Euro/dollar  slightly higher  as the markets await ECB meeting – click on the graph to enlarge.

EUR/USD Fundamentals

• 7:45  French Trade Balance. Exp. -4.2B. Actual -5.3B.
• All   Day: EU Economic Summit (Day 1).
• Tentative: French 10-year Bond Auction.
• 11:00 German Industrial Production. Exp. 0.2%.
• 12:45 Eurozone Minimum Rate. Exp. 0.75%.
• 13:30 ECB Press Conference. Preview:  Will Draghi drag the euro down?
• 13:30 US Unemployment Claims. Exp. 361K.
• 13:30 US Preliminary Non-Farm Productivity. Exp. -1.3%.
• 14:30 US FOMC Member Jeremy Stein Speaks.
• 15:30 US Natural Gas Storage. Exp.  -135B.
• 20:00 US  Consumer Credit.  Exp. 141.1B.

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

EUR/USD Sentiment

• Markets  eye ECB policy meeting: The euro has edged higher, as the market keeps a close eye on Thursday’s ECB policy meeting. Most analysts expect the key interest rate level to be maintained at 0.75%, so no surprises are likely. However, the markets will be closely attuned to follow-up remarks by ECB head Mario Draghi. At the previous policy meeting, Draghi’s optimism about the Eurozone helped fuel the euro’s sharp rise. Will he continue to sound bullish about the economy? If so, we may be in for another rally by the euro.
• Germany, France spar over euro rate: In a speech earlier this week before the European Parliament, French President Hollande called on the Eurozone to set a “medium term”  target for the exchange rate of the euro. Hollande’s remarks were a response to the high-flying currency, which is hurting French exports and the manufacturing industry. However, German officials were quick to state their opposition to such a move. German Economy Minister Phillipp Roesler summed up the view in Berlin, declaring that “the objective must be to improve competitiveness and not to weaken the currency”. While the German economy is showing recovery signs, the French economy continues to stumble, and Hollande is grabbing for any crutches he can lay his hands on, such as a weaker euro. The  question of currency intervention will not disappear anytime soon, with heavyweights France and  Germany at loggerheads over the issue.
• Political  crisis grips Spain: Spain is back in the headlines, but for a change, it’s not about the whether the country will ask for additional rescue funds for the troubled economy. Spanish Prime Minister Mariano Rajoy is involved in a complicated corruption case, and is accused of being involved in illegal transactions. Rajoy has denied any wrongdoing and has rejected calls to resign, but his party is losing public support and the issue could become a crisis for the government, which already has its hands full trying to keep the troubled economy afloat. The government is already deeply unpopular thanks due to worsening recession and staggering unemployment levels, and this latest political crisis could further undermine investor confidence. Spanish borrowing costs rose slightly following the news, as the markets nervously monitor the latest developments out of Madrid.
• Italian banking scandal  casts shadow on  election: Italian elections are always a heated affair, and the current campaign is  no exception,  as Italians head for the polls in a few weeks. The latest twist involves a derivatives scandal at the world’s oldest bank, Monte dei Paschi. One of the largest banks in Italy, it was forced to ask for 3.9 billion euros in state aid last year due to huge losses. Former PM Silvio Berlosconi has sought to capitalize on the scandal, blaming outgoing PM Mario Monti for providing funds to the bank. Both men are prime ministerial candidates in the upcoming election, in what has become a tight race. The scandal could affect the outcome of the election, and has also put ECB head Mario Draghi in the spotlight, since he was the head of the Bank of Italy when the trades in question were carried out. Draghi will likely be questioned on the matter at Thursday’s ECB press conference, following the interest rate announcement.
• Is worst over for Eurozone?: There is growing confidence in the markets that the Eurozone economy may have turned the corner and the worst is now behind us. Recent employment and manufacturing data out of the Eurozone are showing improvement. The highlight was the Eurozone Unemployment Rate which dipped to 11.7%, beating the forecast of 11.9%. Spanish, Italian and Eurozone Manufacturing PMIs were all slightly above the estimate, although all three remain below the 50 point threshold, indicating contraction in the manufacturing sector. The euro continues to trade at high levels after pummelling the US dollar in January. However, many economic indicators point to ongoing weakness in the economy, and an unemployment rate close to 12% will not win any accolades. Still, there is a sense of optimism, and positive sentiment can certainly be a market-mover.