EUR/USD – Euro Posts Huge Gains as Fed Split over QE Tapering

The euro rollercoaster continues to take the markets for quite a ride. On Tuesday, dovish remarks out of the ECB sent the currency to a three-month low against the US dollar. Wednesday saw a dramatic reversal, as the EUR/USD jumped about 350 points, following the release of the minutes of the most recent Federal Reserve Policy meeting. On Thursday, the dollar has partially recovered, as the pair trades in the mid-1.30 range in the European session. In economic news, US 10-year bonds jumped to their highest level in two years, with an average yield of 2.67%. Over in the Eurozone, Germany continues to post weak inflation numbers, as WPI recorded its fourth consecutive decline. The ECB released its monthly bulletin on Thursday and essentially reiterated that the door was still open for further rate cuts. In the US, Thursday’s highlight is Unemployment Claims.

The euro has been struggling badly since mid-June, and looked lost on Tuesday as it dropped into 1.27 territory. There was an expectation that we could see some volatility after the release of the Fed minutes, but few would have predicted that the euro would rocket upwards and flirt with the 1.32 line. The minutes indicated that Federal Reserve policymakers remain deeply divided over when to scale down the current round of QE, whereby the Fed purchases $85 billion in assets each month. About half of the Fed policymakers favor scaling down QE before the end of 2013, while others feel that the employment market is still too fragile for the Federal Reserve to take any action. Meanwhile the dollar continued to lose ground as Federal Reserve chair Bernanke gave a speech in which he said that the Fed would maintain a loose monetary policy for the foreseeable future, due to low levels of inflation and a high US unemployment rate. The dollar was broadly weaker against the major currencies as a result.

In the Eurozone, the political crisis which gripped Portugal last week appears to be over, but its neighbor has its own political crisis brewing. The ruling party in Spain appears to have been involved in a corruption scandal, and Prime Minister Mariano Rajoy has been accused of being involved. There is a report in the Spanish media that Rajoy received illegal payments while serving as a minister in the Aznar government back in the late ’90s. The scandal threatens to topple the government and bring more instability to Spain, which has severe economic problems as it is. Another political crisis in the Eurozone is certainly not good news for the struggling euro.

Eurozone financial ministers met earlier in the week, and decided to release more bailout aid to Greece, but with a catch, as only part of the scheduled tranche of 8.1 billion euros will be transferred to Athens in the next installment. Under the new arrangement, Greece will receive 3 billion euros in July and additional funds in August and October. The Eurogroup decision to give Greece only a portion of the funds currently reflects growing unease with the lack of progress by Athens in implementing the bailout conditions, including improved tax collection and cuts to the bloated public service. Greece has been put on notice that it will have to show more progress in economic restructuring before the troika releases more bailout funds.

EUR/USD for Thursday, July 11, 2013

EUR/USD 1.3059 H: 13147 L: 1.3021

EUR/USD Technical

EUR/USD soared late on Wednesday, gaining over three cents. The pair flirted with the 1.32 line before retracting, and is back in the mid-130 range on Thursday. With the euro posting sharp gains, we start our analysis at higher ground.

EUR/USD is currently receiving support at 1.3050. This weak line could fall if the dollar continues to improve. This is followed by support at the round number of 1.3100. On the upside, the pair is facing resistance at 1.3100. This is not a strong line, and could face more action, given the volatility we are seeing from the pair. This is followed by resistance at 1.3162.

• Current range: 1.3050 to 1.3100

Further levels in both directions:

• Below: 1.3050, 1.3000, 1.2943, 1.2844, 1.2751 and 1.2696
• Above: 1.3100, 1.3162, 1.3275 and 1.34.

OANDA’s Open Positions Ratio

The EUR/USD ratio has shifted directions yet again, and is showing strong movement towards short positions in Thursday trading. This is to be expected, as the strong gains by the euro have resulted in many long positions being covered, resulting in an increased percentage of open short positions. As a result of  this movement, the ratio currently has a slight majority of short positions.

The euro looked razor-sharp on Wednesday, as the dollar was broadly lower following the release of Federal Reserve minutes which pointed to a deep split regarding QE. With the US releasing Unemployment Claims later today, we could see more volatility from EUR/USD.

EUR/USD Fundamentals

• 6:00 German WPI. Estimate 0.3%. Actual -0.4%.
• 6:45 French CPI. Estimate 0.1%. Actual 0.2%.
• 8:00 ECB Monthly Bulletin.
• 8:00 German Buba President Jens Weidmann Speaks.
• 12:30 US Unemployment Claims. Exp. 342K.
• 12:30 US Import Prices. Estimate 0.1%.
• 14:30 US Natural Gas Storage. Estimate 80B.
• 15:00 US FOMC Member Daniel Tarullo Speaks.
• 17:00 US 30-year Bond Auction.
• 18:00 US Federal Budget Balance. Estimate 42.1 billion.

*Key releases are highlighted in bold

*All release times are GMT

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