EUR/USD is trading in a narrow low range and consolidating the big fall that came after the near simultaneous easing steps from the UK, China and especially the ECB, which also eliminated its deposit rate to 0%. Draghi’s words about downside risks having materialized aren’t helping the pair, but it could get some help from an upside surprise in the Non-Farm Payrolls, which promises a strong close to a volatile week.
Here’s an update on technicals, fundamentals and what’s going on in the markets.
- Asian session: Euro/dollar consolidated the losses and traded in a narrow range between 1.2360 and 1.24.
- Current range: 1.2360 to 1.24.
- Further levels in both directions:
- Below: 1.2360, 1.2330, 1.2288, 1.22 and 1.2150.
- Above: 1.24, 1.2440, 1.2520, 1.2624, 1.2670, 1.2750 and 1.2814..
- 1.2360 and 1.2330 aren’t that strong – the 2012 low of 1.228 is the more serious cushion.
- The pair has broken through support at 1.2520, and the pair is testing the 1.25 line.
- On a positive upswing, 1.2624 remains key resistance.
Euro/Dollar consolidating after ECB, before NFP – click on the graph to enlarge.
- 10:00 German Industrial Production. Exp. +0.2%.
- 12:30 US Non-Farm Payrolls. Exp. 97K, but an upside surprise cannot be excluded. See the NFP preview.
- 12:30 US Unemployment Rate. Exp. 8.2%.
- 12:30 US Average Hourly Earnings. Exp. +0.2%.
For more events and lines, see the Euro to dollar forecast
- ECB cuts benchmark and deposit rate: The European Central Bank cut the benchmark lending rate to a new historic low of 0.75% and also eliminated the deposit rate from the previous 0.25%. The move came after more QE from the UK and a rate cut from China and the impact on the euro was quite negative: a drop of over 100 pips in a short time. Draghi added fuel to the fire by saying that downside risks have materialized.
- NFP: Positive surprise could weaken dollar: Recent US figures have mostly been weak. Manufacturing PMI fell into contraction zone and services is at the lowest in over two years. However, the employment components suggest a decent gain in jobs, and so does the strong ADP report. In the current environment, the bar for QE is high and the bar for global gloom is high – a bad figure will be dollar positive (risk aversion), while an upside surprise can encourage risk taking – buying euros. See detailed explanations and scenarios in the NFP Preview.
- Euro sags following summit euphoria: the holes in the EU Summit statement are slowly acknowledged by the markets. Cracks are already apparent in the EU announcement, as another delay in implementation seems imminent. 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.
- German economy showing weakness: Germany cannot stay away from the crisis for too long, as internal indicators show weaker retail sales, business confidence and more. For those investors that see the euro as a heir to the Deutschmark and disregard the debt crisis, this is worrying news.
- Spain’s troubles continue: Spanish yields are on the rise once again and are too close to 7%. The 8 holes in the package are causing quite a lot of trouble. 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.