EUR/USD September 6 Euro Buoyed by ECB Hopes

After some disappointing releases yesterday (September 5th), EUR/USD  has stregthened, as anticipation continues to build  ahead  of the ECB interest rate announcement and  the expected release of the ECB’s bond buying proposal.  The markets are also waiting for three key releases out of the US – ADP Non-farm Employment Change, Unemployment Claims, and ISM Non-Manufacturing PMI. With a day packed with key events, we could see some increased movement by EUR/USD.

Here’s an update about technical lines, fundamental indicators and sentiment regarding EUR/USD.

EUR/USD Technical

• Asian session: Euro/dollar  rose to 1.2630, and consolidated at 1.2627. The pair  has edged down  in the European session.
• Current range: 1.2623 to 1.2670.

Further levels in both directions:

• Below: 1.2587, 1.2520, 1.2440, 1.24, 1.2360, 1.2330, 1.2250, 1.22, 1.2144, 1.2043, 1.20, 1.1876 and 1.17.
• Above: 1.2623, 1.2670, 1.2743 and 1.2814.
• The pair is testing resistance at  the 1.2623 line. The next line of resistance is 1.2670.
• 1.2587 is providing weak support.

Euro/Dollar  higher prior to  ECB  meeting  – click on the graph to enlarge.

EUR/USD Fundamentals

• 9:00  Euro-zone Revised GDP. Actual -0.2%. Exp. -0.2%.
• Tentative:  French 10-year Bond Auction. Actual 2.21%.
• 10:00 German Factory Orders. Exp. +0.3%.
• 11:30 US Challenger Job Cuts.
• 11:45 Euro-zone Minimum Bid Rate. Exp. 0.75%.
• 12:15 ADP Non-Farm Employment Change. Exp. 142K.
• 12:30 ECB Press Conference.
• 12:30 US Unemployment Claims. Exp. 369K.
• 14:00 US ISM Non-Manufacturing PMI. Exp. 52.5 points.
• 14:30 US Natural Gas Storage. Exp. 40B.
• 15:00 US Crude Oil Inventories. Exp. -4.9M.
• 16:30 ECB President Mario Draghi Speaks.

EUR/USD Sentiment

•  ECB  expected to announce bond buying program: At  a crucial  policy meeting today, the ECB is expected to announce details about its bond buying program, which is viewed as a critical step to combat the debt crisis.  At  a parliamentary  meeting which was supposed to take place behind closed doors but found its way to the media, Draghi provided some details about the ECB’s bond buying plan, including an option to buy 3 year bonds – 3 years is also the length of the ECB’s LTRO. The market anticipation could backfire if the ECB proposal is short on content, and the euro could fall as a result. The central bank will also make its interest rate announcement today  – most analysts are counting on the rate to  remain unchanged at 0.75%, but some experts are predicting a  0.25% cut to a record low level of 0.50%.
• “R” word surfaces after weak Retail Sales, Service PMIs: The markets were greeted with some weak readings on Monday. First off, Euro-zone Retail Sales fell by 0.2%. Although this figure matched the market forecast, this is a worrisome reading, as it is the first decline since June. Euro-zone and German Service PMIs also contracted, leading a senior analyst to conclude that the EZ is on track to fall back into technical recession in Q3.
• Fed remains on sidelines: In a highly-anticipated speech at the central bankers’ meeting in Jackson Hole, Fed chief Bernanke dished out little more than what he’s been saying for months – the Fed was closely monitoring the US economy, and was willing to intervene and stimulate the economy with easing measures if conditions worsened. The bottom line? The Fed will stick to the sidelines and there will be no QE3 in September.
• German Court to Rule on ESM: On September 12th, Germany’s Constitutional Court will hand down a decision on the legality of the European Stability Mechanism as it stands for Germany.   The court’s ruling is required in order to ratify the ESM proposal by EU officials. Opponents to the ESM say it is unconstitutional and will harm Germany’s economy. The Court is expected to vote in favor of the proposal, but we could see some fluctuation by the euro in the days prior to the decision, as a rejection of the proposal would be disastrous for the currency.
• Troika talks resume: Greek Finance Minister Evangelos Venizelos met on Tuesday with representatives of the EC, the  ECB and the IMF as negotiations  resume on the austerity program Greece must  implement before its receives the next installment of the bailout package. The  discussions could get  nasty, as the troika is looking for  further cuts to pensions and  concessions by private and public employees. Both steps are are  expected to meet fierce resistance in Greece.  Meanwhile,  the news coming out of Athens remains grim. Unemployment figures are terrible, as the unemployment rate rose to a stagggering 24.4%, up from 23.5%.
• Spain continues to struggle: After Catalonia asked for 5 billion euros of aid, also its southern neighbor joined in. This adds pressure on the central government to hurry up and ask for aid. In an ominous development, a senior Spanish military officer threatened that any unilateral steps by Catalonia towards independence would be met with military force. There was more bad news on the economic front, as the number of unemployed people rose 0.8% in August. This was the first increase in five months, and with the tourist season winding down, the September release could be even worse.
• Bond markets want ECB to take action: Spanish and Italian yields are fairly steady in anticipation of the ECB blitz. Italian 10-year bonds are hovering around   5.82%, down from 5.96% in July. Recent Spanish 10-year yields are in the 6.65% range. This is certainly an improvement from the unsustainable rates above 7% which we saw in the summer. However,  more talk and no action from the ECB  at today’s policy meeting  could undermine investor confidence and send Spanish and Italian yields back up to dangerous levels.