EUR/USD continues to trade close to the 1.31 line, and has pushed above this level in Thursday’s European session. We could see some volatility from the pair later today, following the ECB rate announcement. On Wednesday, US employment numbers did not impress, as ADP Non-Farm Employment was well below expectations. There was better news from the ISM Non-Manufacturing PMI, which came in slightly above the estimate. On Thursday, Spanish 10-year bonds were slightly lower, in contrast to French 10-year bonds, which posted slight gains. German Factory Orders will be released later today. In the US, today’s highlight is Unemployment Claims. The markets are hoping for a turnaround from the key indicator after a disappointing release last week.
Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.
EUR/USD Technical
Asian session: Euro/dollar crossed above the 1.31 line late in the session, touching a high of 1.3120. The pair consolidated at 1.3113. In the European session, the pair is unchanged.
Markets Await ECB Announcement: All eyes will be on the ECB on Thursday, as the powerful central bank meets for a policy meeting. The key interest rate is expected to remain at 0.50%, so the markets will be focusing on the accompanying press conference. Previous press conferences have led to sharp volatility, and if ECB head Mario Draghi again hints at negative interest rates, the euro could react negatively. The ECB’s deposit rate currently stands at zero, and if the ECB decides to go lower, it would be the first central bank to introduce negative interest rates. Negative rates would be bad for the euro, as investors would likely look outside the Eurozone to get more attractive rates for their funds, rather than paying the ECB to hold their deposits. There are several possible scenarios that the markets are prepared for regarding the rate decision.
Spain starts June in style: It isn’t often that Spain posts three strong readings in the same week, but that’s exactly what we’ve seen from the Eurozone’s fourth largest economy.On Wednesday, Services PMI jumped from 44.4 to 47.3 points, its best performance since July 2011, which was the last time that the index was above the 50-point level. Earlier this week, Manufacturing PMI jumped from 44.7 points to 48.1 points, the index’s highest reading since June 2011. This was followed by Unemployment Change, which pointed to 98 thousand less claims, a record for the month of May. Prime Minister Mariano Rajoy, whose government remains deeply unpopular due to a strict austerity program, has asked Spaniards to show more patience. Rajoy could get some much-needed breathing room from these improving numbers. The Spanish PM has said that the worst of the crisis is over, and he would like to cut taxes if the economy improves.
Spanish Employment numbers sparkle: Spain posted some exceptional employment numbers on Tuesday, as Unemployment Change dropped by 98.3 thousand, the best performance ever for the month of May. The estimate stood at -50.2 thousand. The solid numbers are a boost for Spanish PM Rajoy, whose government remains deeply unpopular due to a strict austerity program. However, there’s no need to break out the champagne just yet. May is often a good month for employment numbers, and the Unemployment Rate hit a record high of 27.1% in Q1, so the employment picture remains grim, despite the solid Unemployment Change release.
US employment numbers falter: On Wednesday, ADP Non-Farm Payrolls slipped badly, in what has become a disturbing trend. The key employment indicator missed the estimate for the third straight month. The indicator posted a reading of 135 thousand, well off the forecast of 171 thousand. The markets will get a good look at additional employment numbers, with the US releasing Unemployment Claims later today, and the Unemployment Rate and Non-Farm Payrolls on Friday. We could see some volatility from EUR/USD if these key releases are not in line with market expectations.
Fed hints that QE could be wound up: Although the Fed hasn’t made any changes to the current round of QE, Fed policymakers, including Fed Chair Bernanke, continue to hint that QE could be scaled back in the next few months. With the US continuing to alternate between good and bad economic releases, the Fed may continue to hold off on any changes to QE before it is convinced that the US economy is improving. The currency markets have reacted sharply to talk about terminating QE, and much of the volatility we are seeing from EUR/USD can be attributed to market uncertainty about what action the Fed will take. We can expect the currency markets to continue to be very sensitive to further talk of tapering QE.
Kenny Fisher - Senior Writer
A native of Toronto, Canada, Kenneth worked for seven years in the marketing and trading departments at Bendix, a foreign exchange company in Toronto. Kenneth is also a lawyer, and has extensive experience as an editor and writer.
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