EUR/USD – Euro Steady After Cautious Yellen Speech

EUR/USD is subdued on Tuesday, continuing the lack of activity which marked the Monday session. The pair is trading at 1.1370. On the release front, German Industrial Production posted a gain of 0.8%, matching the forecast. There are no major US events on the schedule, so it could be another quiet day for EUR/USD.

The euro is trading quietly after a closely-watched speech by Fed Chair Janet Yellen on Monday. Speaking at the World Affairs Council in Philadelphia, Yellen said she remained optimistic about the US economy and hinted that the Fed would raise interest rates, but crucially, she gave no indication as to when that might occur. This omission was in sharp contrast to her remarks just over a week ago, when she declared that a hike would likely be appropriate “in the coming months”. Yellen was cautious in her tone on Monday, saying “[i]f incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective as I expect, further gradual increases in the Federal Funds Rate are likely to be appropriate”.  Yellen played down the dismal Nonfarm Payroll report, saying that the markets shouldn’t attach too much significance to one soft report. The markets had lowered expectations for a June rate hike, and Yellen’s speech has all but priced out a June move. However, a rate increase in July or September remains on the table, and any decision by the Fed to raise or maintain rates will be data-dependent, particularly inflation and employment data.

The currency markets wrapped up last week with strong volatility, courtesy of a dismal Nonfarm Payrolls report. The April release plunged to 38 thousand, stunning the markets. This was the lowest reading since August 2010. The estimate stood at 159 thousand, which was almost identical to the previous release. The US dollar took a beating on Friday, and the euro took full advantage, gaining over 200 points, climbing to 3-week highs. The unexpectedly soft release dampened expectations for a June hike. Some of the plunge in the NFP release was attributable to a strike by workers at Verizon, a major communications company. Still, even without this component, the indicator would have posted a gain of only 72,000, well short of expectations. In other US employment news, Average Hourly Earnings, which measures wage growth, posted a weak gain of 0.2%. The unemployment rate fell to 4.7%, but workforce participation dropped to 62.6%. 

As expected, the ECB opted to remain on the sidelines at its policy meeting last week. The ECB maintained its monetary policy, as the main lending rates remained at 0.00%, the deposit rate at -0.40%, and the asset-purchase program (QE) at 80 billion euros/month. Speaking after the ECB announcement, Mario Draghi reiterated that inflation was  likely to remain very low or in negative territory for some time. He stated that the ECB had revised its inflation forecast for 2016 to 0.2% from 0.1%. Draghi acknowledged that “risks to the euro-area growth outlook remain tilted to the downside”, but tried to put a positive spin on the bloc’s economy. However, the markets are likely to remain skeptical about Draghi’s optimistic spin. Eurozone inflation remains far, far away from the target of 2.0%, and given current economic conditions, the inflation picture is unlikely to improve anytime soon. Draghi is clearly reluctant to lower interest rates into negative territory, so he may opt to extend the QE program beyond March 2017. Commerzbank chief economist Jorg Kramer has called Draghi’s monetary stance “forced optimism” and says that the ECB will have no choice but to adopt further stimulus measures.

EUR/USD Fundamentals

Tuesday (June 7)

• 6:00 German Industrial Production. Estimate 0.8%. Actual 0.8%
• 6:45 French Trade Balance. Estimate -4.2B. Actual -5.2B
• 9:00 Eurozone Revised GDP. Estimate 0.5%
• 12:30 US Revised Nonfarm Productivity. Estimate -0.6%
• 12:30 US Revised Unit Labor Costs. Estimate 4.0%
• 14:00 US IBC/TIPP Economic Optimism. Estimate 49.1
• 19:00 US Consumer Credit. Estimate 19.1B

* Key releases are in Bold

*All release times are GMT

EUR/USD for Tuesday, June 7, 2016

EUR/USD June 7 at 8:20 GMT

Open: 1.1363 Low: 1.1349 High: 1.1372 Close: 1.1367

EUR/USD Technical

• EUR/US has been flat in the Asian and European sessions
• 1.1278 is providing support
• 1.1376 remains a weak resistance line and could be tested in the Monday session

Further levels in both directions:

• Below: 1.1278, 1.1054 and 1.0909
• Above: 1.1376, 1.1495 and 1.1638
• Current range: 1.1376 to 1.1495

OANDA’s Open Positions Ratio

EUR/USD ratio is unchanged on Tuesday. This is consistent with the lack of movement shown by EUR/USD. Short positions have a majority (58%), indicative of trader bias towards EUR/USD breaking out and climbing to higher 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.