EUR/USD – Euro Drifting Continues as German PPI Meets Expectations

EUR/USD is steady on Friday, continuing the lack of movement which marked the Thursday session. The pair continues to hug the 1.12 line in the European session. On the release front, it’s a quiet end to the trading week. German PPI posted a small gain of 0.1%, edging above the forecast of 0.0%. Eurozone Current Account impressed, as the surplus surged to EUR 27.3 billion, well above the estimate of EUR 19.6 billion. Over in the US, the sole event on the schedule is Existing Home Sales. The markets are expecting an improvement in the April release, with an estimate of 5.40 million.

The highly-anticipated Federal Reserve minutes were more hawkish than expected, resulting in strong volatility in the global currency markets. The US dollar posted strong gains against most of the major currencies, including the euro, which is struggling to stay above the 1.12 level. The minutes indicated that a June rate hike remains firmly on the table, and the currency markets have reacted with strong volatility. According to the minutes, the Fed wants to see stronger growth in the second quarter as well as better numbers from the inflation and employment fronts. If this is achieved, the Fed said it “likely would be appropriate” to raise rates at the June meeting. This message is somewhat hawkish in comparison to recent statements by Fed chair Janet Yellen, which were more cautious about the strength of the US economy. The markets were skeptical that June would be a “live meeting”, with most analysts assuming that the Fed would continue to sit on the sidelines. The minutes have drastically changed market sentiment, however, since it’s clear that the June meeting will be a crucial one, as it could mark the Fed’s first interest rate hike this year. With the Fed saying that a key factor in a rate hike decision will be the strength of the US economy, upcoming major economic indicators will be under the market microscope, particularly inflation and employment numbers.

Will the ECB make any moves in June? The central bank held the course in April and kept the benchmark rate at zero. At the April policy meeting, ECB president Mario Draghi said that he expected interest rates to remain at current levels or lower for an extended period, warning that he would take action to combat the threat of deflation.  Although there has been some improvement in growth in the Eurozone, inflation levels remain very low, as underscored by Eurozone Final CPI, which was released on Wednesday. The April report dipped to -0.2%, marking its second decline in three months. Core CPI was stronger at 0.7%, but this was lower than the previous reading of 1.0%. Manufacturing inflation numbers also remain weak, as German PPI posted a negligible gain of 0.1%. With the threat of deflation posing a major headache for the ECB, Mario Draghi and Co. are under strong pressure to take action and bolster inflation. However, it’s questionable if the ECB has any monetary ammunition left, as interest rates are at zero and the QE program was expanded earlier this year. Further easing would weaken the euro, so the fact that the ECB has remained on the sidelines has helped the euro trade at high levels.

EUR/USD Fundamentals

Friday (May 20)

• 6:00 German PPI. Estimate 0.1%. Actual 0.2%
• 8:00 Eurozone Current Account. Estimate 19.6B. Actual 27.3B
• 14:00 US Existing Home Sales. Estimate 5.40M

*Key events are in bold

*All release times are GMT

EUR/USD for Friday, May 20, 2016

EUR/USD May 20 at 8:30 GMT

Open: 1.1202 Low: 1.1196 High: 1.1228 Close: 1.1226

EUR/USD Technical

• EUR/USD was flat in the Asian session and has posted small gains in European trade
• 1.1172 is providing support
• There is resistance at 1.1278

Further levels in both directions:

• Below: 1.1172, 11054 and 1.0909
• Above: 1.1278, 1.1378, 1.1495 and 1.1609
• Current range: 1.1172 to 1.1278

OANDA’s Open Positions Ratio

EUR/USD ratio is showing little change on Friday, consistent with the lack of movement from EUR/USD. Short positions command a strong majority (55%). This is indicative of strong trader bias towards EUR/USD breaking out and dropping to lower levels.

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.