EUR/USD – Roller Coaster Ride After Draghi Remarks

EUR/USD displayed strong volatility on Thursday, following the ECB rate announcement and comments by ECB head Mario Draghi at an ECB press conference. The euro dropped sharply but roared back and closed above the 1.29 line. Almost forgotten in the excitement was the fact that the ECB maintained interest rates at a record low of 0.75%. In the US, key releases continued to miss their estimates, as Unemployment Claims rose to their highest level since November 2012. In the Eurozone, Retail Sales and Final GDP both posted declines, but matched their forecasts. Over in the US, it promises to be a busy day with the release of three key events – Non-Farm Employment Change, the Unemployment Rate and Trade Balance.

The euro took the markets on a roller coaster ride Thursday, following the ECB policy meeting. In a widely-expected move, the ECB held the benchmark interest rate at a record-low of 0.75%. What jolted the markets was not the rate announcement, rather the follow-up press conference with Mario Draghi. The head of the ECB hinted at a rate cut in the next few months, and the euro took a tumble, dropping all the way to 1.2749. Draghi did not display his usual optimism that the Eurozone economy would turn the corner in the latter half of 2013. Rather, he said that the ECB was “monitoring very closely” the struggling economy. Draghi did reassure the markets that the Cyprus bailout was a unique situation, and that a tax on bank deposits would not become normal procedure. The markets gave Draghi a thumbs up, as the euro recovered from its losses and then some, touching a high of 1.2949 and closing the day at 1.2926.

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.

With the US continuing to produce weak numbers, there is less talk about the deepening recovery. Last week saw a host of dismal US releases, as manufacturing, housing, consumer confidence and employment figures were all weak. The drought has continued into April, as PMI numbers and the ADP Non-Farm Payrolls fell way below expectations. On Thursday, Unemployment Claims brought no relief. Claims were up sharply to 385 thousand, well above the estimate of 352 thousand. The markets will be crossing fingers on Friday, with the US releasing key employment numbers and Trade Balance. Further poor numbers are likely to raise red flags about the health of the US economy, and this could lead to some volatility in the currency markets.

 

EUR/USD for Friday, April 5, 2013

Forex Rate Graph 21/1/13
EUR/USD April 5 at 9:45 GMT

1.2930 H: 1.2937 L: 1.2901

 

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.2689 1.2757 1.2880 1.2950 1.3000 1.3080

 

EUR/USD is steady in Friday trading, as the pair takes a well-deserved breather after an action-packed Thursday session. The pair is receiving support at 1.2880. This is followed by a support level at 1.2757. On the upside, 1.2950 is providing resistance. This weak line could face pressure if the euro shows any upward movement. The next resistance line can be found at the round number of 1.30.

  • Current range: 1.2880 to 1.2950.

Further levels in both directions:

  • Below: 1.2880, 1.2757, 1.2689, 1.2624, 1.2495
  • Above: 1.2950, 1.3000 and 1.3108 and 1.3189

 

OANDA’s Open Position Ratios

The EUR/USD ratio is showing significant movement towards short positions. We are not seeing this reflected in the current movement of the pair, which is trading quietly after Thursday, in which EUR/USD sustained sharp losses before recovering nicely. The ratio is presently at an even split between long and short positions, indicating a split in trader sentiment as to what direction the pair will take.

The euro showed plenty of movement on Thursday, as EUR/USD moved sharply in both directions in a tumultuous session. The pair is much quieter on Friday, but that could change as the US is set to release three key events before we wrap up the trading week. So we could see some volatility from the pair during the day.

 

EUR/USD Fundamentals

  • 9:00 Eurozone Retail Sales. Estimate -0.3%. Actual -0.3%.
  • 9:00 Eurozone Final GDP. Estimate -0.6%. Actual -0.6%.
  • 10:00 German Factory Orders. Estimate 1.2%.
  • 12:30 US Non-Farm Employment Change. Estimate 198K.
  • 12:30 US Unemployment Rate. Estimate 7.7%.
  • 12:30 US Trade Balance. Estimate -44.8B.
  • 12:30 US Average Hourly Earnings. Estimate 0.2%.
  • 19:00 US Consumer Credit. Estimate 15.5B.

 

*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.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.