EUR/USD July 16 Lower as Markets Cautious Ahead of

EUR/USD  has  edged lower  as the markets begin the trading week in a cautious mood.  Last Friday’s UoM  Consumer  Sentiment release  was lower than expected,  triggering talk of possible QE3. Federal Reserve  Chairman  Bernard  Bernanke  will  address what  monetary action the Fed is prepared to take  when he testifies later this week before  the Senate.  Both Euro-zone and Italian Trade Balance releases  were well above market estimates. US Retail sales, a key indicator, will be published later today.

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

EUR/USD Technicals

• Asian session: Euro/dollar was marked by quiet trading, edging downwards and consolidating at 1.2230.  In the European session, the pair has dropped just below the 1.22 line.
• Current range: 1.2150 to 1.22.

• Further levels in both directions:
• Below: 1.2150, 1.20 and 1.1876.
• Above: 1.22, 1.2280, 1.2330, 1.2360, 1.24, 1.2440, 1.2520 and 1.2624.
• 1.2330 is the next serious line of resistance.
• 1.22 is only a minor line before the clear historic separator of 1.2150.

Euro/Dollar  weaker, testing the 1.22 line  – click on the graph to enlarge.

EUR/USD Fundamentals

• 8:00 Italian Trade Balance. Exp. -0.97B. Actual 1.01B.
• 9:00: Euro-zone CPI. Exp. +2.4%. Actual +2.4%.
• 9:00: Euro-zone Core CPI. Exp. +1.6%. Actual +1.6%.
• 9:00:  Euro-zone Trade Balance.  Exp. +4.8B. Actual 6.3B.
• 12:30 US Core Retail Sales. Exp. +0.1%.
• 12:30 US Retail Sales. Exp. +0.1%.
• 12:30 US Empire State Manufacturing Index. Exp. +3.9 points.
• 14:00 US Business Inventories. Exp. +0.2%.

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

EUR/USD Sentiment

• More Talk of QE3:  Although Bernanke has not given any indication that the Fed will step in and implement QE3, it seems that every time there is a weak US release, the markets  are again  looking for possible Fed action. This week  is no  exception, as  speculation of QE3 increased following the weak UoM  Consumer  Sentiment numbers. Bernanke will be testifying later in the week before the US Senate Banking Committee, and the markets will be on edge, waiting to see if the Fed hints at  taking any  monetary action. For the time being, Operation Twist is as far as the Fed is willing to go, unless the US economy weakens.
• US consumer confidence falls: For the second consecutive month,the highly respected UoM Consumer Sentiment  dropped, and was also  below market expectations. The indicator came in at 72.0 points, disappointing the markets, which had predicted a reading of 73.5 points. This points to weaker consumer confidence in the US economy, which could hamper the economic recovery.
• China GDP slumps: Chinese GDP climbed up 7.6%, a bit lower than the market forecast of 7.7%. Although this figure is huge compared to the growth numbers in Western countries, the reading underscores a worrying trend. It is the ninth consecutive drop in China’s GDP, dating back to July 2010. However, traders should always treat this indicator with caution, as there are numerous reasons to be skeptical about the accuracy of these releases. The fact that the China may be manipulating its key economic releases may only exacerbate market fears of a slowdown in the world’s number 2 economy.
• Italy’s credit rating drops: There was more bad news for Italy’s slumping economy, as Moody’s lowered Italy’s credit rating by two notches to near-junk status on Thursday. The rating agency cited Italy’s higher borrowing costs, weak growth, and the risk of contagion from Greece and Spain.With the mounting bad economic news, Italy may ask for a bailout sooner rather than later.
• Spain announces tough austerity program: The Spanish economy is in bad shape, with an ailing bank sector, declining growth and a staggering unemployment rate of over 24%. Under strong pressure from the EU, the government announced a EUR 65 billion austerity plan, which includes a sales tax hike and slashing government expenditures including unemployment benefits.The announcement has already drawn sharp criticism in Spain, and many analysts feel that these measures will only prolong Spain’s recession.
• ESM faces legal hurdle: The European Stability Mechanism, which is the Euro-zone’s rescue fund, was supposed to come into effect on July 1. However, the German Constitutional Court has delayed its decision on whether the ESM complies with German law.  ESM cannot go ahead without German support, so for now, the ball is in the hands of the court.