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After  yesterday’s (July 2nd) losses, EUR/USD  is fluctuating, trading close to the 1.26 line.  Last week’s euphoria has quickly given way to market uncertainty  as to whether the new measures outlined at the European Summit will  resolve the  crippling debt crisis. Attention is  now shifting to  the ECB.  There are growing expectations (and hopes)  for a rate cut by the  central bank  when it meets on Thursday. Euro-zone PPI was a disappointment, contracting by 0.5% in June. There are only a few releases scheduled for today, as the US gears up for the  Fourth of July holiday.

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

EUR/USD Technicals

  • Asian session: Euro/dollar moved upwards, reaching 1.2614.  The pair  consolidated just under the 1.26 line, at 1.2598. In the European session, the pair continues  to fluctuate  above and below  the 1.26 line, and was trading at 1.2591.
  • Current range: 1.2520 to 1.2624.

  • Further levels in both directions:
  • Below: 1.2520, 1.2440, 1.24, 1.2330, 1.2288, and 1.22.
  • Above: 1.2624, 1.2670, 1.2760, 1.2814 and 1.2873, 1.29 and 1.2960.
  • Yet again, the January 2012 low of 1.2624 proved to be strong in both directions. It is currently providing weak resistance.
  • 1.2520 is providing the pair with strong  support.

Euro/Dollar fluctuating close to 1.26 line – click on the graph to enlarge.

EUR/USD Fundamentals

  • 9:00  Euro-zone PPI. Exp. -0.2%. Actual -0.5%.
  • 14:00 US Factory Orders. Exp. +0.1%.
  • All Day: US Total Vehicle Sales. Exp. 14.0M

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

EUR/USD Sentiment

  • After EU Summit –  will euro rally continue?: In a dramatic late night effort, EU leaders agreed that the ESM will NOT have seniority over private bondholders. This will help in calming investors. Other than that, they decided on allowing the ESM bailout fund to recapitalize banks and buy bonds, but the statement is quite ambiguous. The  good news for the weaker  zone members is that bailout funds can now be distributed directly to banks  that need help,  without adding to the national debt.    There are at least 5 holes in the EU Summit statement, so the rally we saw on Friday could falter later on. Cracks are already apparent in the EU announcement, as the Netherlands and Finland want to block ESM bond buying. As well, German Chancellor Merkel is facing heavy criticism for caving in at the Summit and will  face a tough time  selling the deal to skeptical German lawmakers.
  • NFP Buildup: US Manufacturing PMI was very disappointing, as the key index contracted for the first time in three years. This could  mean that this week’s employment releases  will be weak. If these figures fall  below the  market forecasts, this could be further indication of a US economy in trouble, and we could see the dollar drop as a result.
  • German economy showing weakness: The drop in retail sales joins earlier disappointments and shows that Germany is not immune. Last week’s saw a disastrous German ZEW Economic Sentiment  and a rise in unemployment. With the Euro-zone  in deep trouble, a sputtering German economy will throw a big wrench into  any recovery plans.
  • Spain’s trouble continue: Spanish yields continue falling after Friday’s big move and this supports the euro.There are still some uncertainties and at least 8 holes in the aid package. More details about the bailout are expected on July 9th. The Spanish government is feeling the heat, and  recently passed a new law limiting cash transactions.    Meanwhile, Spain’s weak housing sector received more bad news, as house prices declined by 2.8% in Q2.  With the national team winning the Euro 2012 soccer tournament in style, Spaniards had something to cheer about, and spent Monday celebrating and putting their economic troubles aside for a brief time.
  • Italy next for bailout?: Italian Prime Minister  Mario Monti has asked for help from Germany and the ECB as the situation worsens. The Euro-zone’s third largest economy is also suffering from a problematic banking system. This may explode later on. The economy isn’t doing much better, as GDP is squeezing fast. Italy cannot hide behind Spain for too long. If the economy continues to deteriorate, Italy could be the next EZ member to hop onto the bailout bandwagon.
  • Will Fed take action?: In June, the Fed decided not to introduce QE, but did announce that it would extend Operation Twist. However, with the very weak  Manufacturing PMI release, QE3 cannot be discounted, and  the pressure on the Federal Reserve to take action will only increase if the US economy continues to churn out weak figures.