EUR/USD – Slump Continues as Euro Approaches 1.30 Line

EUR/USD picked up on Friday where it left off the day before, with the pair continuing to fall. The euro rally, which looked so promising just a few days ago, now seems like the distant past as the pair tests the significant 1.30 line. Will the downward slide continue? In the US, employment news was mixed on Thursday, as the ADP Non-Farm Employment Change looked very sharp. However, Unemployment Claims also rose, disappointing the markets. In Friday’s releases, Spanish Services PMI beat the forecast. This follows an outstanding reading for Spanish Unemployment Claims, which fell sharply to a six-month low. In the US, the markets are waiting for more employment data, with the scheduled release of the official Non-Farm Employment Change and the all-important Unemployment Rate. Friday’s other highlight out of the US is ISM Non-Manufacturing PMI.

This week has been a rollercoaster ride for the euro, which had reacted very positively to news of the fiscal cliff agreement earlier this week. The euro had climbed as high as 1.3299 on Wednesday, but has dropped sharply. However, the rally turned out to be very short-lived, and the euro has nosedived since. What happened to the rally which looked so promising just a few days ago? With the fiscal cliff behind us, at least for a bit, the markets refocused on Euro-zone data, and were not impressed with some soft PMI numbers out of the Eurozone. Another factor weighing on market sentiment is the release of the minutes of the December FOMC meeting, where the suggestion was raised to end QE4 sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar.

The markets breathed a sigh of relief as the fiscal cliff agreement was approved in Congress, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

As we move into 2103, the markets are closely watching Europe’s banking sector, which has been hard hit by the debt crisis. This dire situation has led to a sharp drop in the amount of bank loans to private households. Such loans dropped by 0.8% in November compared to a year ago, after a similar decline in October. The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.

EUR/USD for Friday, January 4, 2013

EUR/USD January 4 at 10:00 GMT
1.3011 H: 1.3050 L: 1.3003

EUR/USD Technical

EUR/USD continues to drop sharply, and is very close to the significant 1.30 level. There is weak resistance at 1.3030. Although there is no sign of a correction to the current trend, this line could see activity if the USD/EUR levels off and the euro rebounds. On the downside, 1.2960 is the next line of support. It has not been tested since early December, when the euro began its rally against the dollar. This is followed by strong support at 1.2890.
Current range: 1.2960 to 1.3030.
Further levels in both directions:
• Below: 1.2960, 1.2890, 1.28, 1.2750, 1.2690 and 1.2624.
• Above: 1.3030, 1.3080, 1.3130, 1.3180, 1.3240, 1.3180, 1.3130, 1.3280 and 1.3350.

OANDA’s Open Position Ratios
Despite the ongoing volatility characterizing EUR/USD, the ratio is showing little movement, with a very slight change in favor of long positions. Trader sentiment continues to be strongly biased towards short positions, an indication that most traders expect the euro to lose further ground. This position has been vindicated in the past day or so, and the euro has not shown any signs of reversing the slide.
EUR/USD has had a volatile week, posting sharp drops after flexing some muscle following the fiscal cliff deal. The fluctuation could continue right into the weekend, before we see a break in the action early next week.

EUR/USD Fundamentals
• 7:00 German Retail Sales. Estimate 0.9%. Actual 1.2%.
• 8:15 Spanish Services PMI. Estimate 42.7 points. Actual 44.3 points.
• 8:45 Italian Services PMI. Estimate 45.1 points. Actual 45.6 points.
• 9:00 Eurozone Final Services. Estimate 47. 8 points. Actual 47.8 points.
• 10:00 Eurozone CPI Flash Estimate. Estimate 2.1%. Actual 2.2%.
• 10:00 Italian Preliminary CPI. Estimate 0.2%. Actual 0.3%.
• 13:30 US Non-Farm Employment Change. Estimate 150K.
• 13:30 US Unemployment Rate. Estimate 7.7%.
• 13:30 US Average Hourly Earnings. Estimate 0.2%.
• 15:00 US ISM Non-Manufacturing PMI. Estimate 54.2 points.
• 15:00 US Factory Orders. Estimate 0.3%.
• 15:30 US Natural Gas Storage. Estimate -129B.
• 16:00 US Crude Oil Inventories. Estimate -0.7M.
• 20:30 US FOMC Member Janet Yellen Speaks.

*Key releases are highlighted in bold
*All release times are GMT

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