EUR/USD May 16 – Steady as Markets Await Key US Releases

EUR/USD  continues to  trade under the 1.29 level, following  weak releases on Tuesday  out of  Europe  in the US.  In the Eurozone, French German and Italian GDP all missed their estimates.  In the US, there was disappointing inflation and manufacturing numbers.  Taking a look at  Wednesday’s releases, Eurozone CPI and Core CPI matched their estimates, while Italian  and  Eurozone trade balances beat  the forecast.  The  markets will have plenty of data to analyze out of the US, which releases four key events today – Building Permits, Core CPI, Unemployment Claims and the Philly Fed Manufacturing Index.

Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.

EUR/USD Technical

• Asian session: Euro/dollar  was quiet, touching a low of 1.2857 and consolidating at 1.2865.
• Current range: 1.28 – 1.2880.

Further levels in both directions:

• Below: 1.2805, 1.2750, 1.27, 1.2624 and 1.2587.
• Above: 1.2880, 1.2960, 1.30, 1.3030, 1.31, 1.3160 and 1.32.
• 1.2805 is the border of the long term 1.2805 – 1.3170 and is critical support.
• 1.2880 turns into resistance, but it is not that strong at the moment. 1.2960 is more significant.

Euro  steady as Eurozone inflation  numbers meet expectations  – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:45 French Preliminary Non-Farm Payrolls. Exp. -0.3%. Actual: -0.1%.
• 8:00 Italian Trade Balance. Exp. 1.72B. Actual 3.24B.
• 9:00 Eurozone CPI: Exp. 1.2%. Actual 1.2%.
• 9:00 Eurozone Core CPI: Exp. 1.0%. Actual 1.0%.
• 9:00 Eurozone Trade Balance: Exp. 11.8B. Actual 18.7B.
• 11:45 US FOMC Member Eric Rosengren Speaks.
• 12:30 US Building Permits. Exp. 0.94M.
• 12:30 US Core CPI. Exp. 0.2%.
• 12:30 US Unemployment Claims. Exp. 332K.
• 12:30 US CPI. Exp. -0.3%.
• 12:30 US Housing Starts. Exp. 0.98M.
• 14:00 US  Philly Fed Manufacturing Index.  Exp. 2.5 points.
• 14:30 US Natural Gas Storage. Exp. 96B.
• 16:30 US  FOMC Member  Sarah Bloom  Rosengren Speaks.

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

EUR/USD Sentiment

• Euro-zone recession continues:  There was bad news on Tuesday, as economic releases pointed contraction in the Eurozone  for a third quarter in a row. Output fell by 0.2%. At the time of the publication, this wasn’t totally unexpected, as Germany provided a big disappointment earlier: the economy grew by only 0.1% in Q1, short of 0.3% expected. Q4 was revised to a contraction of 0.7%. GDP numbers out of France and Italy also fell  below their estimates. The euro lost ground as a result, and dipped below the 1.29 level for the first time since early April.
• ECB contemplates negative deposit rates:  The mention of negative deposit rates was not accidental.  ECB head Mario Draghi mentioned the idea when the ECB lowered interest rates a few weeks ago.  Earlier in the week,  ECB member Ignazio Visco reiterated that the ECB is considering the idea. The ECB would be the first major central bank to adopt negative deposit rates. Proponents of the idea argue that it would  increase lending to businesses and help boost economic activity in the sluggish Eurozone, but it could also scare money away, too fast. The mere mention of the negative rate weighs on the euro.
• US picture shows  improvement, but not a one way street:  Recent  employment numbers have been looking positive.  Last week, Unemployment Claims came in at  323 thousand new claims, well below the estimate of 333 thousand.  It was the third consecutive week that jobless claims has beaten expectations. This is excellent news, but the markets will want to see strong numbers from other sectors of the economy to be convinced that the US is headed in the right direction. Retail sales were good, but fresh data such as the Empire State indicator and industrial production curbed the dollar rally. We could see the euro move after the US releases Unemployment numbers, as well as a  host of other key  data,  later on Thursday.
•  To taper or not to taper: This is the vexing question facing the Federal Reserve. Is the recovery sustainable? The Fed mentioned that fiscal policy is restraining the recovery, but at least tax revenue is up, and this defers the political issues regarding the debt ceiling. The Fed has not given any clues that it might scale back the current QE, which involves asset purchases of $85 billion every month. However, if the US recovery shows stronger signs of recovery, pressure will increase on the Fed to ease up on the QE, which would be dollar-positive.