EUR/USD July 10 – Lower after ECB Rate Comments, Solid

The euro continues to struggle against the strong US dollar. On Tuesday, the currency took dropped sharply and fell into 1.27 territory, following  comments by a senior ECB official that  the central bank’s interest  rates would remain at low levels.  A solid JOLTS Job Openings release also contributed to the euro’s drop. EUR/USD  has recovered partially and is trading in the low-1.28 range in Wednesday’s European session. In the Eurozone, French Industrial Production posted a decline, and Italian  Industrial Production fell short of the estimate.  In the US, we have three key releases on the schedule. The US holds a 10-year bond auction,  and the Federal Reserve will release the FOMC minutes, which could shake up the markets. As well, Federal Reserve head Bernard Bernanke will speak in Cambridge Mass.

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 lower, touching a low of 1.2766.  The pair consolidated at 1.2793. In the European session,  Euro/dollar has climbed  back above the 1.28 line.

Current range: 1.2800 – 1.2840.

Further levels in both directions:  

• Below: 1.28, 1.2750, 1.27, 1.2660 and 1.26.
• Above: 1.2840, 1.2890, 1.2940, 1.30, 1.3050, 1.3100, 1.3160, 1.32, 1.3255, 1.3350 and  1.34
• 1.2800 was breached on   Tuesday and is providing weak support. 1.2750 is next.
• 1.2840 is providing weak resistance. This is followed by 1.2890.

Euro  struggling after  dropping below 1.28 line  – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00  German Final CPI. Exp. 0.1%. Actual 0.1%.
• 6:45 French Industrial Production. Exp. -0.5%. Actual -0.4%.
• 8:00  Italian Industrial Production. Exp. 0.1%. Actual 0.4%.
• 14:00 US Wholesale Inventories. Exp. 0.3%
• 14:30 US Crude Inventories. Exp. -2.9M.
• 17:00 US 10-year Bond Auction.
• 18:00 FOMC Meeting Minutes.
• 20:10 US Federal Reserve Chairman Bernard Bernanke Speaks.

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

EUR/USD Sentiment

• Euro dips below 1.28: On Tuesday, the euro dropped to a low of 1.2756, its lowest level since early April. The currency fell after ECB executive board member Jorg Asmussen stated that the ECB  could  maintain present interest rates  for  more than  12 months. The ECB rate is currently at a record low of 0.50%. Asmussen’s comments  echoed remarks by Mario Draghi that interest rates would remain at low levels for an “extended” period. So we’re unlikely to see any  hike in rates as long the Eurozone continues to experience weak growth. The dollar got some help  on Tuesday  from the JOLTS Job Openings release, which came in at 3.73 million, slightly above the estimate of 3.81 million. Although JOLTS is a late indicator, it is closely watched by the Fed.
• Markets eye Federal Reserve: With the US posting solid employment  numbers and the economy looking stronger, there is increased speculation that the Fed will scale back QE. Fed head Bernanke stated that the Fed would act by the end of the year if the economy continues to improve, and this has resulted in a massive sell-off of US bonds, raising yields and bolstering the dollar. Analysts will be combing through the minutes of the FOMC’s most recent policy meeting, which will be released on Wednesday. We could see some volatility in the currency markets after this key release. Bernanke will be addressing an economic conference later on, and the markets will be listening carefully for any clues as to the Fed’s future monetary policy plans.
• Portugal crisis eases:  The political crisis which gripped Portugal last week  appears to be over. The country has been struggling with austerity measures as part of its bailout program, and the government  was rocked by the resignations of the finance and foreign ministers last week. Coelho said a deal had been reached with a junior coalition party, which would ensure that the government continues to run the country. There was concern that the crisis could derail  Portugal’s 78 billion bailout agreement. The political deal is subject to the approval of Portugal’s president, Anibal Cavaco Silva.  At a Eurogroup meeting in Brussels on Monday, German Finance Minister Wolfgang Schaeuble expressed confidence that the crisis was over.
• Spanish PM accused of corruption: Just when it seemed that the Portuguese government had dodged a severe political crisis, its eastern neighbor has its own political hot potato to worry about. The ruling party in Spain appears to have been involved in a corruption scandal, and now Prime Minister Mariano Rajoy has been implicated as well. There is a report in the Spanish media that Rajoy received  illegal payments  while serving as a minister in the Aznar government back in the late ’90s.  If the scandal deepens,  it could  topple the  government, and lead to turmoil in the country. Clearly, another political crisis in Europe will have a negative impact on the shaky euro.
• Eurogroup releases  some bailout aid to Greece: Eurozone financial ministers met on Monday, and decided to release more aid to Greece, but only part of the scheduled tranche of 8.1 billion euros. Greece will receive 3 billion euros in July and additional funds in August and October. The Eurogroup  decision to give Greece only a portion of the funds points to dissatisfaction with the lack of progress by Athens in implementing the bailout conditions, including  improved tax collection  and  cuts to the bloated public service. Greece will have to show more progress in economic restructuring before the troika releases more bailout funds.