EUR/USD – Draghi Leaves Door Open Further Cuts

EUR/USD was volatile after last week’s rate cut, but this week is a different story. The pair has settled down and is quietly trading close to the 1.31 line. It remains to be seen if the rut cut will have its intended effect and breathe some life into the anemic Eurozone economy. Meanwhile, ECB head Mario Draghi said on Monday that the ECB was open to additional cuts if needed. In economic news, France was the focus on Monday. Industrial Production missed the estimate, while the trade deficit narrowed. Today’s highlight is German Factory Orders. In the US, it is another quiet day, with two minor releases, as well as a speech from Treasury Secretary Jack Lew.

On Thursday, the ECB pulled the trigger and reduced interest rates to 0.50%, a record low. The rate had been pegged at 0.75% since July 2012. The move was widely expected, as the Eurozone economy remains in poor shape, and many of the major European economies are in recession. However, the euro initially moved higher before dropping sharply. The catalyst for the drop was comments by ECB head Mario Draghi that he was considering a negative deposit rate for banks. The deposit rate, which is what the ECB pays Eurozone banks for overnight deposits, currently stands at 0%. A negative rate could lead to funds flowing out of the Eurozone, and the euro was down more than one cent on Thursday as a result. The euro recovered partially on Friday, and has started the new trading week quietly.

After the ECB took action and reduced interest rates, the markets had a chance to hear ECB head Mario Draghi, who spoke in Rome on Monday. Draghi said that last week’s cut was taken due to the continuing slowdown in the Eurozone, and urged Eurozone countries to take the necessary steps to get their fiscal houses in order. Draghi repeated that the ECB was open to further rate cuts, as well as lowering its deposit rates below zero. When he mentioned the latter point last week, the euro took a dive, but this time, the markets did not react. However, not all policymakers favor further reductions. Yves Mersch, an ECB board member, stated that interest rate cuts have limits to their effectiveness.

Back in the US, last week’s employment numbers were welcome news, as the US has been churning out mostly weak key releases. Unemployment Claims came in below expectations for the second straight week. The key indicator dropped from 339 thousand to 324 thousand, blowing past the estimate of 346 thousand. On Friday, Non-Farm Payrolls climbed to 165 thousand. This easily beat the estimate of 146 thousand. As well, the Unemployment Rate fell from 7.6% to 7.5%. Improving employment numbers are critical for economic growth, and the markets are hoping that the good news continues.

EUR/USD for Tuesday, May 7, 2013

EUR/USD 1.3106 H: 1.3107 L: 1.3069

EUR/USD Technical

EUR/USD is trading quietly in Tuesday trading. On the downside, the pair continues to test the 1.31 level. There is stronger support at 1.3050. On the upside, 1.3170 is providing resistance. This followed by resistance at 1.3240.

• Current range: 1.3100 to 1.3170

Further levels in both directions:

• Below: 1.31, 1.3050, 1.3000, 1.2960 and 1.2880
• Above: 1.3170, 1.3240, 1.3306, 1.3398 and 1.3479

OANDA’s Open Positions Ratio

The EUR/USD ratio is showing movement towards long positions in Tuesday trading. This is not reflected in what we are seeing from the pair, which is not showing much movement. The movement in the ratio could be an indication that the euro will break out and post gains against the US dollar. Meanwhile, the long positions continue to enjoy a majority of the open positions.

After some volatility from EUR/USD late last week, EUR/USD continues to trade quietly, near the 1.31 line, for the second straight day. It is another quiet day in terms of fundamental releases, so we could see the narrow range trading continue. 

EUR/USD Fundamentals

• 6:45 French Industrial Production. Estimate -0.2%. Actual -0.9%.
• 6:45 French Government Budget Balance. Actual -31.0B.
• 6:45 French Trade Balance. Estimate -5.3B. Actual -4.7B.
• 10:00 German Factory Orders. Estimate -0.4%.
• 14:00 US IBD/TIPP Economic Optimism. Estimate 47.1 points.
• 19:00 US Consumer Credit. Estimate 16.2B.
• 20:00 US Treasury Secretary Jack Lew Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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