EUR/USD – Lower Ahead of ECB Policy Meeting

The euro has posted losses in Wednesday’s European session, as EUR/USD has retreated to the low-1.35 range. The markets are keeping a close eye on the upcoming ECB policy meeting, where the ECB is expected to maintain its benchmark rate at 0.75%. In the US, ISM Non-Manufacturing PMI was down slightly, but matched the market forecast. There are just two economic releases on tap for Wednesday. The euro remains under pressure, as the market keeps a close eye on Thursday’s ECB policy meeting. Most analysts expect the key interest rate level to be maintained at 0.75%, so no surprises are likely. However, the markets will be closely attuned to remarks by ECB head Mario Draghi, following the interest rate announcement. At the previous policy meeting, Draghi’s optimism about the Eurozone helped fuel the euro’s sharp rise. Will he continue to sound bullish about the economy? If so, we may be in for another rally by the euro.

In Italy, national elections are less than three weeks away. Italian elections are always a heated affair, and the latest twist involves a derivatives scandal at the world’s oldest bank, Monte dei Paschi. One of the largest banks in Italy, it was forced to ask for 3.9 billion euros in state aid last year due to huge losses. Former PM Silvio Berlosconi has sought to capitalize on the scandal, blaming outgoing PM Mario Monti for providing funds to the bank. Both men are candidates in the upcoming election, in what has become a tight race. The scandal could affect the election, and has also put ECB head Mario Draghi in the spotlight, since he was the head of the Bank of Italy when the trades in question were carried out. Draghi will likely be questioned on the matter at Thursday’s ECB press conference, following the interest rate announcement.

Spain is also in the headlines, but for a change, it’s not about the whether the country will ask for additional rescue funds for the troubled economy. Spanish Prime Minister Mariano Rajoy is involved in a complicated corruption case, and is accused of being involved in illegal transactions. Rajoy has denied any wrongdoing and has rejected calls to resign, but his party is losing public support and the issue could become a crisis for the government, which already has its hands full trying to keep the troubled economy afloat. The government is already deeply unpopular thanks due to worsening recession and staggering unemployment levels, and this latest political crisis could further undermine investor confidence. Spanish borrowing costs rose slightly following the news, as the markets nervously monitor the latest developments out of Madrid.

Back in the US, recent economic indicators continue to keep the markets guessing about the extent of the US recovery. Recent key releases continue to paint a mixed picture. GDP was a major disappointment, as the economy contracted for the first time since 2009. Employment numbers lost their recent shine, as NFP and Unemployment Claims failed to meet expectations, and the unemployment rate inched up to 7.9%. On the bright side, last week’s consumer sentiment and manufacturing PMI data was very strong. In Wednesday’s releases, ISM Non-Manufacturing PMI, a key indicator, declined slightly, but still matched the estimate. With only a handful of key US releases this week, each one will find itself under the market microscope as the markets try to get a handle on where the US economy is headed.

EUR/USD for Wednesday, February 6, 2013

EUR/USD February 6 at 10:30 GMT

1.3514 H: 1.3596 L: 1.3514

EUR/USD Technical

EUR/USD has given up most of Tuesday’s gains, and is trading in the 1.3530 range. 1.3550 continues to provide weak resistance on the upside. This line has seen a lot of activity, and this could continue. 1.3627 is providing stronger resistance. On the downside, 1.3480 is the next line of support. This is followed by the round number of 1.34.

Current range: 1.3480 to 1.3550.

Further levels in both directions:

• Below: 1.3480, 1.34, 1.3350, 1.3280, 1.3240 and 1.3170.
• Above: 1.3550, 1.3627, 1.3690, 1.3745, 1.3796, 1.3858 and 1.3936 and 1.40.

OANDA’s Open Position Ratios

The EUR/USD ratio continues to show strong movement, but has now reversed direction, with thd trend currently pointed towards short positions. This movement is reflected in the current movement of the pair, which has also reversed direction and is moving southwards. If the euro continues to lose ground, we can expect the present move in the ratio to continue.

After a spectacular January, the euro has hit some turbulence. Is the euro’s rally over? Or will it continue after a short pause? With the markets awaiting the ECB rate announcement, we could be in a holding pattern until the markets hear what Draghi has to say.

EUR/USD Fundamentals

• 11:00 German Factory Orders. Estimate 0.8%.
• 15:30 US Crude Oil Inventories. Estimate 2.7M. 

*Key releases are highlighted in bold

*All release times are GMT

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.