EUR/USD – Euro Edges Lower Despite Positive German Data

EUR/USD has edged lower in Thursday trading. The pair has dropped below the 1.32 line in the European session and is struggling, despite a positive German release to start off the day. German Ifo Business Confidence, a key release, came in at 106.2 points, very close to the estimate of 1.06.3. There was also a pleasant surprise out of Spain, as the unemployment rate dropped for the first time in two years. Over in the US, New Home Sales soared to its best showing in five years. We could see some volatility from the pair during the day, as the US releases two major events – Core Durable Goods Orders and Unemployment Claims.

This week’s US housing releases has analysts scratching their heads, as the releases pointed in opposite directions. Earlier in the week, Existing Home Sales dropped from 5.18 million to 5.08 million, way off the forecast of 5.27 million. However, New Home Sales soared on Wednesday, jumping from 476 thousand to 496 thousand, well above the estimate of 482 thousand. This was the key housing indicator’s best performance in five years. With mixed housing releases this week, the markets will have to wait for the August releases to get a better handle on the direction of the US housing industry.

In the Eurozone, there was good news on Tuesday, as Services and Manufacturing PMIs out of France, Germany and the Eurozone all improved and beat their estimates. The news was especially good out of Germany, as Services PMI climbed above the 50 level for the first time since February, while Manufacturing PMI improved to 52.5 points. The 50-point level separates between contraction and expansion. The improving PMIs point to increasing confidence on the part of purchasing managers with regard to the manufacturing and services sectors. Further strong releases from these industries could be a sign that the Eurozone is finally on the road to economic recovery.

When will the Federal Reserve take the plunge and start to scale back QE? Despite the zigzagging we’ve seen on this issue from the Fed, there is a strong likelihood that this will take place before the end of 2013, barring a major downturn by the US economy. There is speculation that the Fed could take action in September. Appearing on Capitol Hill last week, Fed chair Bernard Bernanke was careful not to get pinned down with any specific deadlines, and instead said that stronger growth and lower unemployment were the key factors to any action over QE. The problem with this approach is the markets remain in the dark, and every strong US release fuels expectation about QE tapering, while a weak release does the opposite. This of course, contributes to market instability, as we’ve seen in recent months with the US dollar. The G20 seemed to have this issue in mind when it issued a statement that member countries had agreed that future monetary policy moves would be “carefully calibrated and clearly communicated”. Whether the Fed will suddenly show its cards is doubtful, especially in light of Bernanke’s vague and rather dull performance in front of Congress last week.

Most analysts would agree that an unemployment rate of over 26% is not news to celebrate, but it was positive news for Spain, which saw its staggering unemployment rate decline from 27.2% to 26.3%. This marked the first monthly drop since July 2011, when the unemployment rate was around 21%. Spain has posted some good numbers data lately, leading Spain’s finance minister de Guindos to declare that Spain’s economy is improving “beyond seasonal effects”. The markets are hoping that the finance minister is correct, and that Spain’s economy continues to post solid numbers after the summer.

EUR/USD for Thursday, July 25, 2013

EUR/USD 1.3193 H: 1.3237 L: 1.3166

EUR/USD Technical

EUR/USD is not showing much movement, as the proximate support and resistance lines remain in place (S1 and R1 above). The pair crossed above the 1.32 line in the Asian session but  fell back into 1.31 territory in the European session. EUR/USD continues to receive support at 1.3162. This line is not strong, and was tested in the European session. It could break if the euro loses more ground. The next support level is at the round number of 1.3100.

On the upside, the pair continues to face resistance at 1.3275. This is followed by a resistance line at 1.3400, which has held firm since mid-June.

• Current range: 1.3162 to 1.3275

Further levels in both directions:

• Below: 1.3162, 1.3100, 1.3050, 1.3000, 1.2943 and 1.2844
• Above: 1.3275, 1.34, 1.3476 and 1.3585

OANDA’s Open Positions Ratio

After showing little change during the week, EUR/USD is back in action as we see movement in favor of short positions. This is not reflected in the pair, which is trading very quietly on Thursday. A majority of the ratio’s positions are short, indicating that trader sentiment is biased towards the dollar posting gains at the expense of the euro.

Eurozone PMI data looked crisp on Wednesday, and German business confidence was solid on Thursday. However, the euro has had a muted response and failed to take advantage of the good news. The US releases key manufacturing and employment data later today, so we could see some movement from EUR/USD.

EUR/USD Fundamentals

• 7:00 Spanish Employment Rate. Estimate 27.2%. Actual 26.3%.
• 8:00 German Ifo Business Climate. Estimate 106.3 points. Actual 106.2 points.
• 8:00 Eurozone M3 Money Supply. Estimate 3.0%. Actual 2.3%.
• 8:00 Eurozone Private Loans. Estimate -0.9%. Actual -1.6%.
• 12:30 US Core Durable Goods Orders. Estimate 0.5%.
• 12:30 US Unemployment Claims. Estimate 339K.
• 12:30 US Durable Goods Orders. Estimate 1.1%.
• 12:45 US Treasury Secretary Jack Lew Speaks.
• 13:00 Belgium NBB Business Climate. Estimate -11.2 points.
• 14:30 US Natural Gas Storage. Estimate 44B.

*Key releases are highlighted in bold

*All release times are GMT

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