EUR/USD July 5 All Eyes on ECB, US Employment Data

EUR/USD  is  trading close to the 1.25 line  after losing ground yesterday (July 4th), as the markets  wait for today’s ECB interest rate announcement. The central bank is widely expected to lower interests rates from the present 1.0% level. Last week’s euphoria following the EU Summit has quickly given way to market uncertainty as to whether the new  proposals announced at  the Summit  will be able to resolve the crippling debt crisis. After the Fourth of July holiday, the US markets will be busy, with three key indicators being released today –  ADP Non-Farm Employment Change, Unemployment Change and Non-Manufacturing PMI. The markets will also be hoping for better news out of Germany ,with  the release of  German Factory Orders. With a flurry of activity today  in both the Euro-zone and the US, we could see some movement by EUR/USD.

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

EUR/USD Technicals

• Asian session: Euro/dollar reached a low of 1.2513, and edged upwards to consolidate at 1.2522. The pair is  down slightly in the European session.
• Current range: 1.2520 to 1.2624.

• Further levels in both directions:
• Below: 1.2440, 1.24, 1.2330, 1.2288, and 1.22.
• Above: 1.2520, 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. This line is strengthening has the euro has weakened.
• The pair has broken through support at 1.2520, and the pair is testing the 1.25 line.
• 1.2440 is providing strong support.

Euro/Dollar  is weakening as markets await ECB  rate announcement  – click on the graph to enlarge.

EUR/USD Fundamentals

• 9:00 Spanish 10-y Bond Auction. Actual. Avg. yield 6.43%.
• Tentative:  French 10-y Bond Auction.
• 10:00  German Factory  Orders.  Exp. +0.1%.
• 11:30  US Job Cuts.
• 11:45 ECB Minimum Bid Rate.  Exp. 0.75%.
• 12:15 ADP Non-Farm Employment Change. Exp. 103K. See how to trade this event with EUR/USD.
• 12:30 ECB Press Conference.
• 12:30 US Unemployment Claims. Exp. 385K.
• 14:00 US Non-Manufacturing PMI. Exp. 53.1 points.
• 15:00 US Crude Oil Inventories. Exp. -1.6M.

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

EUR/USD Sentiment

• ECB expected to lower rates: The markets are expecting the ECB to cut interest rates on Thursday from the present 1.0% rate. Most analysts are predicting a 0.25% drop, but some are forecasting a 0.50% cut. The 1.0% level is already a  record low, so a 0.25% reduction  appears more likely.  ECB head Mario Draghi is under pressure to take action to help stimulate and stabilize the EZ, and lower interest rates will help improve economic activity and boost exports. With the buildup of anticipation prior to the rate announcement, the ensuing press conference promises to be most interesting.
• Euro  sags following summit euphoria: After the EU Summit announced a series of measures to deal with the debt crisis in the Euro-zone, the euro jumped by about 2% against the dollar. At the Summit, leaders agreed that the ESM will NOT have seniority over private bondholders and that the ESM bailout fund  can be used to directly  recapitalize banks and buy bonds. 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. However, the EU statement was short on specifics, and there are at least 5 holes in the EU Summit statement. Cracks are already apparent in the EU announcement, as the Netherlands and Finland want to block  ESM bond buying. As well, German Chancellor Angela Merkel is facing heavy criticism for caving in at the Summit and will face a tough time selling the deal to skeptical German lawmakers.
• US data disappoints: US Manufacturing PMI was very disappointing, as the key index contracted for the first time in three years. The markets will be carefully watching the Non-Farm Employment Change and Unemployment Rate releases on Friday. 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 to the EZ crisis.  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. The markets will be closely watching today’s release of German Factory Orders.
• Spain’s troubles continue: There bailout package for Spain may be a done deal, but there are still some uncertainties and at least 8 holes in the 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.  At Thursday’s government auction of 10 year bonds, the average yield was 6.43%. The yield was higher than that of the previous auction one month ago of 6.04%.
• Dark Clouds Hovering over Italy: Italian PM 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 is in deep trouble, as PMIs are pointing downwards, retail sales and consumer activity is weak, and the  GDP contracted by almost 1% in Q1. Italy cannot hide behind Spain for too long. If the economy continues to deteriorate, Italy could be the  sixth  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 a host of weak data, most recently Manufacturing PMI, QE3 cannot be discounted. If this week’s US employment data is weak, pressure on the Federal Reserve to take action will increase. Meanwhile, speculation is growing that the Fed will step in and implement QE to  shore up  the US economy.