EUR/USD – Markets Await ECB Rate Decision

EUR/USD has edged lower in the Wednesday’s European session. The pair had been showing little movement, but has dipped into the low 1.30 range. The markets are waiting for the ECB to make its interest rate announcement on Thursday. Wednesday will be quiet in terms of fundamental releases. The Eurozone Revised GDP looked weak, but managed to meet market expectations. In the US, today’s major release is ADP Non-Farm Employment Change.

The markets remain jittery about developments in Italy, as the political stalemate, which has paralyzed the Eurozone’s third largest economy, shows no signs of a breakthrough. The head of the Center-left bloc, Pier Luigi Bersani, urged the maverick leader of the 5-Star Movement, Beppe Grillo, to support a new government or agree to new elections. So far, Grillo has refused to throw his support behind any other party, resulting in a political deadlock that threatens to paralyze the Eurozone’s third largest economy. Grillo, a former comedian, has not minced his disdain for the established political leaders, and called Bersani a “dead man walking”. The stalemate could force new elections in a country weary from a sluggish economy, a staggering debt and a dysfunctional electoral system. Meanwhile, Grillo suggested that Italy hold a referendum on whether to remain in the Eurozone. Italy is facing a crushing debt of two trillion euros, and Grillo has called for the country to renegotiate terms. Grillo, who led his party to a stunning showing in last week’s election, can now play kingmaker in any coalition talks, and his rhetoric attacking the euro and harsh spending cuts can no longer be dismissed. Many analysts believe that Grillo, who has risen to political prominence thanks to a huge protest vote, would prefer returning to the polls rather than forming a coalition with the established parties.

At a gathering of European finance ministers earlier this week, Spain asked for more flexibility and time in order to reduce its budget deficit. Economy Minister Luis de Guindos pointed to the fact that Spain had lowered its deficit and restored its credibility with international credit markets. Indeed, Spain has reduced its budget deficit from 9% of GDP in 2011 to under 7% in 2012. However, this still falls well below the EU budget deficit limit of 3%. Theoretically, the EU could halt aid to Spain due to its lack of compliance, but such a drastic step is very unlikely, especially as other members have fudged their budget numbers and have not been penalized. The bloc wants (and needs) to see Spain regain its financial footing, and some compromise will likely be reached between Brussels and Madrid.

Back in the US, Janet Yellen, vice-chair of the US Federal Reserve, underscored the Federal Reserve’s intent to continue its current QE program and ultra-low interest rates. Yellen said that she hoped that the low interest rates would facilitate a “return to prudent risk-taking”. The current round of QE involves the purchase of $85 billion in assets each month, and critics have expressed the fear that this could lead to “asset bubbles”. However, both Fed Chair Bernanke and Yellen have argued that the benefits of a stronger recovery outweigh any such risks. Defending the Fed’s asset purchases, Yellen cited a study which found that when the central bank purchases $500 billion in bonds, unemployment drops a quarter of a percentage point within three years. Yellen’s remarks come on the heels of Beranke’s testimony on Capitol Hill, where he defended the Fed’s monetary policy.

 EUR/USD for Wednesday, March 6, 2013

1.3029 H: 1.3071 L: 1.3029

EUR/USD Technical

EUR/USD has edged downwards in Wednesday trading, but the proximate support and resistance lines remain in place (S1 and R1 above).  On the downside, the pair is receiving support at the round number of 1.3000. This is a weak but important line, and could face pressure if the euro continues to move lower. The next support level is at 1.2950. On the upside, the pair faces resistance at 1.3080. This is followed by resistance at 1.3130.

Current range: 1.3000 to 1.3080.

Further levels in both directions:

• Below: 1.3000, 1.2950, 1.2882 and 1.2802
• Above: 1.3080, 1.3130, 1.3170, 1.3280, 1.3350 and 1.34

OANDA’s Open Position Ratios

The EUR/USD ratio is back in action after a lull on Tuesday. The ratio is pointing to movement towards short positions. This is consistent with what we are seeing from the  pair, as the euro has lost ground against the dollar in Wednesday trading. The ratio remains close to an event split, indicating trader sentiment is divided as to where the pair is headed. If the current movement in the ratio continues, we could see the euro lose more ground.

The markets are waiting for the ECB rate announcement and Mario Draghi’s take on the health of the Eurozone, all which will take place on Thursday. We could see some volatility from the pair, based on the reaction of the markets to the rate announcement and accompanying press conference.

EUR/USD Fundamentals

• 10:00 Eurozone Revised GDP. Estimate -0.6%. Actual -0.6%
• 13:15 ADP Non-Farm Employment Change. Exp. 172K
• 15:00 US Factory Orders. Estimate -2.2%
• 15:30 US Crude Oil Inventories. Estimate 0.9M
• 19:00 US Beige Book.

*Key releases are highlighted in bold

*All release times are GMT

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.