EUR/USD – Unsteady Ahead of ECB Rate Announcement

EUR/USD is showing some fluctuation in Thursday trading. The pair hit some turbulence in the Asian session, and dropped below the 1.30 level. EUR/USD has bounced back in European trading, but we’re likely to see more movement ahead of the ECB’s rate announcement later today. The ECB is expected to hold interest rates at their current level of 0.75%. In the Eurozone, France and Spain held a 10-year bond auction, and the yields in both auctions were lower than the previous release. The markets will be a watching German Factory Orders. There are two key releases out of the US later today – Trade Balance and Unemployment Claims.

All eyes are fixed on Brussels, as the ECB announces its benchmark interest rate for the Eurozone. Most analysts are expecting the central bank to maintain the current level of 0.75%. The rate has not budged since July 2012, so a cut in the rate would likely send shock waves through the financial markets. At the same, time, weak growth and unemployment figures out of the Eurozone could lead to interest rate cuts later this year. There may be no change to the rated, but often it is the accompanying press conference, hosted by ECB head Mario Draghi, which is the highlight of the show. Draghi’s optimistic statements at recent press conferences were bullish for the euro, but with Eurozone numbers looking weak (with the exception of Germany), the markets may not like what they hear, and the euro could get hurt.

As if the Eurozone doesn’t have enough problems on its plate, the political crisis continues to paralyze Italy, the Eurozone’s third largest economy. Center-left leader Pier Luigi Bersani has expressed his readiness to form a minority government with populist leader Beppe Grillo. Grillo, the unpredictable head of the 5 Star Movement, has so far refused to join forces with any other party, and seems content to force new elections. Parliament will sit for the first time next week, and President Giorio Napolitano is expected to begin consultations with party leaders on March 19, as efforts to sort out the political paralysis shift into high gear.

Ata meeting of European finance ministers met earlier this week, Spain said it needs more time to reduce its budget deficit. Economy Minister Luis de Guindos noted that Spain had lowered its deficit and restored its credibility on the international markets. Indeed, Spain has made progress, reducing its budget deficit from 9% of GDP in 2011 to under 7% in 2012. However, this is still well above the EU limit of 3%. Theoretically, the EU could halt aid to Spain due to its lack of compliance, but Brussels is unlikely to take such harsh action. The bloc wants to see Spain regain its financial footing, and some compromise will likely be reached between Madrid and Brussels.

Recent US economic data has looked sharp, and has raised speculation that the Fed might wind up its current round of QE, which involves the purchase of $85 billion in assets each month. Although Fed Chair Bernard Bernanke and Vice-Chair Janet Yellen have recently declared that QE will continue, evidence of a stronger recovery would put pressure on the Fed to reconsider. If this week’s key employment data beats expectations, there will be more pressure on the Federal Reserve to wind down or at least modify its current stimulus package.

EUR/USD for Thursday, March 7, 2013

1.3036 H: 1.3034 L: 1.2975

EUR/USD Technical

EUR/USD has shown some volatility in Thursday trading. The pair fell below the 1.3000 support level, but has recovered. EUR/USD continues to receive support at 1.3000, although this is a weak line and could see futher activity. There is stronger support at 1.2950. On the upside, 1.3080 is providing resistance. 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 pointed to movement towards short positions on Wednesday. It has since reversed course, and is pointing to strong movement towards long positions. This is consistent with what we are seeing currently, as the euro has made some gains and pushed into the mid-1.30 range. The ratio is close to an even split between short and long positions, as traders remain divided as to the next move by EUR/USD.

The euro is fluctuating as the markets wait for the ECB announcement. Although the rate is widely expected to remain unchanged, the pair could react to what Mario Draghi has to say at the press conference that follows. Look for EUR/USD to continue to show volatility.

EUR/USD Fundamentals

• 7:45 French Trade Balance. Estimate -4.8B. Actual -5.9B
• 9:45: Spanish 10-year Bond Auction. Actual 4.92%
• 9:59: French 10-year Bond Auction. Actual 2.10%
• 11:00 German Factory Orders. Estimate 0.6%
• 12:30 US Challenger Job Cuts
• 12:45 ECB Minimum Bid Rate. Estimate 0.75%
• 13:30 ECB Press Conference
• 13:30 US Trade Balance. Estimate  -42.8B.
• 13:30 US Unemployment Claims. Estimate 354K
• 13:30 US Revised Nonfarm Productivity. Estimate -1.6%
• 13:30 US Revised Unit Labor Costs. Estimate. 4.4%
• 15:30 US Natural Gas Storage. Estimate -135B
• 18:15 US FOMC Jerome Powell Speaks
• 20:00 US Consumer Credit. Estimate 15.2B
• 21:30 US Bank Stress Test Results

*Key releases are highlighted in bold

*All release times are GMT

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