EUR/USD – Euro Dips Below 1.12, Markets Await German Economic Sentiment

The euro continues to soften, and is trading at 1.1170 in Tuesday’s European session. On the release front, Italian Trade Balance sparkled at 6.02 billion euros, well above the estimate. Next up is ZEW Economic Sentiment, a key event. The forecast is calling for a weak reading of 0.1 points, so we could see some movement from the pair after this release. Later in the day, Germany’s Constitutional Court will hear arguments concerning the ECB’s Outright Monetary Transactions policy. In the US, today’s highlight is the Empire State Manufacturing Index, with the markets braced for a weak reading. We’ll get a look at some key US data on Wednesday, with the release of Building Permits and PPI. As well, the Federal Reserve will publish the minutes of its January policy meeting.

When ECB head Mario Draghi talks, the markets listen. This was again the case on Monday, as Draghi appeared before the European Parliament’s Economic and Monetary Affairs Committee. Draghi said that the ECB was “ready to do its part” in a reference to persistently low inflation levels which have gripped the Eurozone. Although Draghi didn’t really add anything new, his comments were welcome news to jittery markets, which are banking on Draghi making significant moves at the ECB’s policy meeting in March. Such measures could include reducing interest rates into negative territory and expanding the current quantitative easing program, which currently stands at 60 billion euros/month. These monetary moves would likely see the euro soften against the dollar. If the ECB repeats the December fiasco, when the markets were expecting action and the ECB fiddled on the sidelines and failed to deliver, the euro could again post huge gains. 

On Tuesday, Germany’s constitutional court will examine whether the ECB’s Outright Monetary Transactions (OMT) program is legal. This scheme, which allowed the ECB to buy unlimited amounts of government debt, was announced in 2012, but was never implemented. Meanwhile, the ECB has been purchasing bonds through its quantitative easing (QE) program. The court is not expected to issue a verdict until later in the year, and the verdict could have repercussions regarding the QE program, which is slated to continue until March 2017.

The markets were all ears last week as Federal Reserve Chair Janet Yellen testified before Congress, and her message was markedly different than the upbeat statement from the Fed back in the heady days of December. At that time, the Fed raised rates by 0.25%, the first upward move in a decade, and hinted at a series of rate hikes in 2016. Fast forward to February appearance before Congress, where Yellen refused to rule out negative interest rates. The Fed has rejected making such a move in the past, and this is unlikely to change. Still, Negative Interest Rate Policies (NIRP) has become a relevant tool for central banks. The Bank of Japan shocked the markets in January when it adopted negative rates, and the ECB has had this policy in place for some time on deposits, and has hinted that it could adopt this scheme to its benchmark rate, which is currently at 0.05%. Such a scheme is supposed to combat deflation and boost economic growth by pressuring banks to increase lending. In her testimony, Yellen noted that inflation rates in the US have remained very low due to the strong dollar and weak oil prices. Given the current economic situation, many experts expect no more than two rate hikes this year, perhaps in June and December. At the same time, any improvement in key US numbers will heat up speculation about a possible March hike.

EUR/USD Fundamentals

Tuesday (Feb. 16)

• 4:00 Italian Trade Balance. Estimate 3.87B 
• Tentative – German Constitutional Court Ruling
• 5:00 German ZEW Economic Sentiment. Estimate 0.1 points
• 8:30 US Empire State Manufacturing Index. Estimate -10.5 points
• 10:00 US NAHB Housing Market Index. Estimate 60 points
• 16:00  US TIC Long-Term Purchases
• 19:30 US FOMC Member Eric Rosengren Speaks

Upcoming Key Events

Wednesday (Feb. 17)

• 8:30 US Building Permits. Estimate 1.21M
• 8:30 US PPI. Estimate -0.2%
• 14:00 FOMC Meeting Minutes

*Key events are in bold

*All release times are EST

EUR/USD for Tuesday, February 16, 2016

EUR/USD February 16 at 4:15 EST

Open: 1.1177 Low: 1.1193 High: 1.1147 Close: 1.1178

EUR/USD Technical

• EUR/USD has shown marginal movement in the Asian and European sessions
• 1.1172 was tested earlier in support. It is a weak line
• There is resistance at 1.1278
• Current range: 1.1172 to 1.1278

Further levels in both directions:

• Below: 1.1172, 1.1087, 1.0941 and 1.0847
• Above: 1.1278, 1.1349 and 1.1495

OANDA’s Open Positions Ratio

EUR/USD ratio is showing slight movement towards long positions. Still, short positions retain a strong majority of positions (59%). This points to trader bias towards the euro continuing to head to lower ground.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.