EUR/USD – Euro in Holding Pattern Ahead of Fed Minutes

The euro is steady on Wednesday, as the pair trades at 1.1140 in the European session. On the release front, the sole European release is the German 10-year Bond Auction. It’s a busy day in the US, including Building Permits and PPI. Today’s highlight is the Federal Reserve minutes from its January policy meeting.

ECB head Mario Draghi appeared before a European Parliament economic committee on Tuesday, and the markets were all ears. Draghi said that the ECB was “ready to do its part”, to combat persistently low inflation levels which have gripped the Eurozone. Although Draghi didn’t really add anything new, his comments were welcome news to jittery markets, which are banking on Draghi making significant moves at the ECB’s policy meeting in March. Such measures could include reducing interest rates into negative territory and expanding the current quantitative easing program, which currently stands at 60 billion euros/month. These monetary moves would likely see the euro soften against the dollar. However, there is always the possibility that the ECB will disappoint the markets by keeping its hands folded and doing nothing. This occurred during the December policy meeting – the markets were expecting action, but instead the ECB fiddled on the sidelines and failed to deliver, and the euro responded with huge gains. 

The ECB was in court on Tuesday, as Germany’s constitutional court heard arguments concerning the legality of ECB’s Outright Monetary Transactions (OMT). This scheme, which allowed the ECB to buy unlimited amounts of government debt, was announced in 2012, but was never implemented. Meanwhile, the ECB has been purchasing bonds through its quantitative easing (QE) program. The ECB has argued that OMT is within its mandate. The court is not expected to issue a verdict until later in the year, and the verdict could have repercussions regarding the QE program, which is slated to continue until March 2017. Germany, which generally calls the shots in the ECB by virtue of its economic clout, has never been a fan of the ECB’s bond-purchasing schemes, and it is noteworthy that Jens Weidmann, head of the German central bank, voted against both the OMT and QE programs.

The Federal Reserve will again take center stage on Wednesday, with the release of the minutes of the January policy meeting. In the policy statement after the meeting, Janet Yellen & Co. sounded cautious, saying  that the Fed was “closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation”. The decision to hold interest rates at 0.25% was unanimous, and the Fed acknowledged that the US economy was slowing down. Gone was the optimism which characterized the December meeting, when the Fed raised rates and hinted at further rate hikes in 2016. Given the current economic situation, many experts expect no more than two rate hikes this year, perhaps in June and December. At the same time, any improvement in key US numbers will heat up speculation about a possible March hike.  There was an interesting development last week when Janet Yellen appeared before Congress and refused to rule out negative interest rates. The Fed has rejected making such a move in the past, and this is unlikely to change. Still, Negative Interest Rate Policies (NIRP) has become a relevant tool for central banks. The Bank of Japan shocked the markets in January when it adopted negative rates, and the ECB has had this policy in place for some time on deposits, and has hinted that it could adopt this scheme to its benchmark rate, which currently stands at 0.05%. Such a scheme is supposed to combat deflation and boost economic growth by pressuring banks to increase lending.

EUR/USD Fundamentals

Wednesday (Feb. 17)

• Tentative – German 10-year Bond Auction
• 8:30 US Building Permits. Estimate 1.21M
• 8:30 US PPI. Estimate -0.2%
• 8:30 US Core CPI. Estimate 0.1%
• 8:30 US Housing Starts. Estimate 1.16M
• 9:15 US Capacity Utilization Rate. Estimate 76.7%
• 9:15 US Industrial Production. Estimate 0.3%
• 14:00 FOMC Meeting Minutes
• 18:00 FOMC James Bullard Speaks

Upcoming Key Events

Thursday (Feb. 18)

• 8:30 US Philly Fed Manufacturing Index. Estimate -2.9 points
• 8:30 US Unemployment Claims. Estimate 275K

*Key events are in bold

*All release times are EST

EUR/USD for Wednesday, February 17, 2016

EUR/USD February 17 at 3:45 EST

Open: 1.1177 Low: 1.1193 High: 1.1147 Close: 1.1139

EUR/USD Technical

• EUR/USD has shown marginal movement in the Asian and European sessions
• 1.1172 remains busy and has switched to a resistance role. It is a weak line
• 1.1087 is providing support
• Current range: 1.1087 to 1.1172

Further levels in both directions:

• Below: 1.1087, 1.0941 and 1.0847
• Above: 1.1172, 1.1278, 1.1349 and 1.1495

OANDA’s Open Positions Ratio

EUR/USD ratio is unchanged, consistent with the lack of movement from EUR/USD. Short positions retain a strong majority of positions (59%). This points to trader bias towards the euro losing ground.

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.