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EUR/USD May 3 – Euro Drops as ECB Cuts Rates to 0.50%

The ECB lowered its benchmark interest rate on Thursday by 0.25%, bringing the rate to a record low of 0.50%. EUR/USD

responded negatively, dropping over a cent on Thursday. The pair has

moved upwards on Friday, and pushed above the 1.31 line early in the

European session. In economic news, US releases looked sharp, as Trade

Balance and Unemployment Claims beat expectations. There are three key

events out of the US on Friday – Non-Farm Payrolls, the Unemployment

Rate and ISM Non-Manufacturing PMI.

Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.

EUR/USD Technical

Asian session: Euro/dollar was uneventful, and consolidated at

1.3172. The pair has gained ground in the European session, and crossed

above the 1.31 line.

Current range: 1.3100 to 1.3400.

Further levels in both directions:

Below: 1.31, 1.3050, 1.3000, 1.2960, 1.2880, 1.2805, 1.2750 and 1.27.

Above: 1.3140, 1.3170, 1.3255, 1.3290, 1.3350 and 1.34.

On the downside, the pair is testing 1.31.

1.3140 is providing weak resistance. Next is 1,3170, a key level.

Euro makes up some ground after sharp losses on Thursday – click on the graph to enlarge.

EUR/USD Fundamentals

9:00 EU Economic Forecasts.

9:00 EU PPI.

12:30 US Non-Farm Employment Claims. Exp. 146K.

12:30 US Unemployment Rate. Exp. 7.6%.

12:30 US Average Hourly Earnings. Exp. 0.2%.

14:00 US ISM Non-Manufacturing PMI. Exp. 54.1 points.

14:00 US Factory Orders. Exp. -2.8%.

16:30 US Federal Reserve Governor Daniel Tarullo Speaks.

For more events and lines, see the Euro to dollar forecast

EUR/USD Sentiment

ECB pulls the trigger: For the first time in almost

a year, the ECB lowered interest rates, to a record low of 0.50%. The

rates had been pegged at 0.75% since July 2012. Most analysts had

expected the cut, as the Eurozone economy remains sluggish, and many of

the major European economies have been bitten by recession. However, the

markets reacted negatively to comments by ECB head Mario Draghi that

the ECB would consider a negative deposit rate for banks. The

deposit rate, which is what the ECB pays Eurozone banks for overnight

deposits, currently stands at 0%. The euro was down more than one cent

on Thursday as a result.

Fed stays on the sidelines: The FOMC policy

statement was a non-event on Wednesday, as the Fed basically noted that

it wasn’t willing to take further steps, despite weakness in the

economy. This

was a relatively hawkish statement from the Fed, which tends to be more

dovish. Currently, the Fed is purchasing $85 billion in assets under

the QE program, and did not indicate any changes were coming. The Fed

did take a shot at the government’s economic policy, saying that current

fiscal policy was restraining economic growth.

US Data Improves: The US has been struggling with

weak releases since late March, so a couple of strong releases on

Thursday was welcome news. The trade deficit narrowed from $43.0 billion

to $38.8 billion, easily beating the estimate of $42.1 billion.

Unemployment Claims came in below expectations for the second straight

week. The key indicator dropped from 339 thousand to 324 thousand,

blowing past the estimate of 346 thousand. We’ll get a better picture of

the US employment situation on Friday, as the US releases Non-Farm

Payrolls and the Unemployment Rate.

Italian numbers improve: A loud sigh of relief

could be heard in the markets, as Italy announced earlier in the week

that a government had been formed. Although the new coalition will have

its hands full with economic challenges, there was some good news this

week from economic indicators. Italian 10-year bonds were down, dropping

below 4%. This is an important sign of renewed investor confidence in

the Italian economy. There was further positive news as the Italian

Monthly Unemployment Rate nudged lower, from 11.6% to 11.5%. This beat

the estimate of 11.7%. On Thursday, Italian Manufacturing PMI came in at

45.5 points, above the forecast of 44.9 points. If the markets see more

good news out of the Eurozone’s third largest economy, the euro could

push higher.

German Data Mixed: German data looked sluggish last

week, and Tuesday’s numbers were mixed. Retail Sales declined 0.3%,

below the estimate of 0.2%. Unemployment Change came in at 4 thousand

new claims, worse than the estimate of two thousand. On the bright side,

Consumer Climate rose to 6.2 points, beating the estimate of 5.9

points. In order for the Eurozone to stage a recovery, Germany’s

weakness was an important factor in the ECB’s decision to cut rates, and

the Eurozone will be unlikely to recover if German numbers don’t

improve.

Monday, May 6, 2013

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EUR/USD May 3 – Euro Drops as ECB Cuts Rates to 0.50%

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