EUR/USD – Lower as Markets Await ECB Policy Meeting

EUR/USD has lost ground in Thursday trading, as the pair is struggling to remain above the 1.28 level in the European session. The markets are eagerly waiting for the ECB interest rate announcement and follow-up remarks by Mario Draghi, the head of the ECB. Taking a look at economic releases, Eurozone PMIs continue to point to contraction. In Spain, 10-year bonds fetched a lower yield than the previous auction. The action will shift to the US later today, with the release of Unemployment Claims. Also, Federal Reserve Chair Bernard Bernanke will address a conference in Dayton.

There is anxiety in the air as the ECB meets later today, but it is not over the interest rate announcement, as rates are widely expected to remain at the current level of 0.75%. Rather, the markets are waiting for remarks by Mario Draghi at a press conference following the rate announcement. Draghi will not be able to simply reiterate that he is confident that the ECB economy will turn the corner later in 2013. The Cyprus bailout rocked financial markets and has taken a toll on investor confidence, leaving the markets in a sour mood. Eurozone releases have not had much good news lately, and Draghi may have to pull a magic act to restore confidence in the markets and shore up the shaky euro.

The drama and uncertainty in Cyprus, one of the Eurozone’s smallest members, continues, even though a bailout plan has been accepted by all sides. Strict capital controls are still in place in Cyprus in order to prevent a run on the banks. Under the bailout agreement, bank deposits below EUR100,000 are safe, but larger accounts with the Bank of Cyprus will be facing a haircut of up to 60%. An amount of 37.5% of these deposits will be converted into bank shares, and up to 22.5% more could be grabbed in order to prop up the Bank of Cyprus’ reserves. This steep tax is expected to have a strong negative impact on the country’s business sector, and the government has admitted that the country is in recession. In order to help the ailing economy, the government plans to lift a ban on casinos and provide tax exemptions on business profits that are reinvested on the island. President Nicos Anastasiades has acknowledged that the bailout agreement is a bitter pill for Cypriots, but said that refusing the agreement would have meant the collapse of the banking sector and could have led to Cyprus’ exit from the Eurozone. In a dramatic development, Cyprus finance minister Michael Sarris has resigned. His resignation comes as Cyprus initiates a formal investigation to examine the events which lead to the EUR10 billion bailout.

Mario Draghi will do his best to reassure nervous markets about the prospects of the Eurozone, but it’s hard to argue with cold facts (or economic releases), which are not showing promising signs of a recovery. This has been underscored by disappointing data this week. PMI numbers throughout the Eurozone point to continuing weakness. Service PMIs out of Italy, Spain and the Eurozone on Thursday were all below the 50-point level, indicating contraction in the service sectors. Meanwhile, the employment situation on the continent is dismal, as the unemployment in the Eurozone edged up to a record high of 12.0%. We can expect the euro to remain under pressure if we don’t see an improvement in economic data out of the Eurozone.

In the US, there is concern about a steady string of weak data. Last week saw a host of dismal US releases, as manufacturing, housing, consumer confidence and employment figures all fell below expectations. The bad news has continued into April, as PMIs and the ADP Non-Farm Employment Change were way below the estimates. The markets will be hoping for better news from today’s major event, Unemployment Claims.

EUR/USD for Thursday, April 4, 2013

1.2808 H: 1.2853 L: 1.2783

EUR/USD Technical

EUR/USD was steady in the Asian session, and consolidated at 1.2835. The pair has weakened in the European session, and is testing the 1.28 level. The line of 1.2805 is under pressure, and was breached earlier as the pair dipped into 1.27 territory. The next support level is at 1.2757. On the upside, there is resistance at 1.2880. This line has strengthened as the pair trades at lower levels.

Current range: 1.2757 to 1.2805

Further levels in both directions:

• Below: 1.2757, 1.2689, 1.2624, 1.2495
• Above: 1.2805, 1.2880, 1.2950, 1.3000 and 1.3080

OANDA’s Open Position Ratios

In Thursday trading, the EUR/USD ratio is showing movement towards short positions. This is reflected in the current movement by the pair, as the euro is losing ground and is testing the 1.28 line.

The euro continues to lose ground, as nervous markets await the ECB policy meeting later today. Remarks by ECB head Mario Draghi have moved the markets in previous meetings, so there is a strong chance that EUR/USD will show some activity after his comments. As well, US Unemployment Claims could cause some fluctuation by the pair, so traders should expect the pair to be busy on Thursday.

EUR/USD Fundamentals

• 7:15 Spanish Services PMI. Estimate 44.3 points. Actual 45.3 points.
• 7:45 Italian Services PMI. Estimate 43.4 points. Actual 45.5 points.
• 8:00 Eurozone Final Services PMI. Estimate 46.5 points. Actual 46.4 points.
• 8:45 Spanish 10-year Bond Auction. Actual 4.48%.
• 9:00 Eurozone PPI. Estimate 0.2%. Actual 0.2%.
• 9:02 French 10-year Bond Auction. Actual 1.94%.
• 11:30 US Challenger Job Cuts.
• 11:45 ECB Minimum Bid Rate. Estimate 0.75%.
• 12:30 ECB Press Conference.
• 12:30 US Unemployment Claims. Estimate 352K.
• 12:45 US FOMC Member Charles Evan Speaks.
• 14:30 US Fed Chairman Bernard Bernanke Speaks.
• 14:30 US Natural Gas Storage. Estimate -89B.
• 16:30 US FOMC Member Esther George Speaks.
• 21:00 US FOMC Member Janet Yellen Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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