EUR/USD – Testing 1.34 as Spotlight on Federal Reserve

EUR/USD is steady in Wednesday trading, as the pair tests the 1.34 line in the European session. It has been an uneventful week for the euro so far, but that could change on Wednesday, as the US Federal Reserve releases a policy statement. In the Eurozone, today’s only release was a German auction for 10-year bonds. The average yield was 1.55%, slightly above the previous yield. On Tuesday, US releases were mixed. Building Permits and Core CPI, both key events, came in as expected. However, Housing Starts disappointed, as it fell below the estimate.

All eyes will be glued on the US Federal Reserve on Wednesday, as the FOMC releases a highly anticipated policy statement. The markets will be particularly interested in what the Fed has to say with regard to its quantitative easing program. Speculation has been growing that the Fed could scale back QE later in the year, and this has had a very strong impact on stocks, commodities and the US dollar. The Federal Reserve has repeatedly stated that it will stick with the current program until it sees an improvement in the US economy, especially in the labor market. Currently the Fed purchases $85 billion in assets every month. If the Fed does take action or even hint at a move to tighten QE, we can expect the dollar to move higher against the major currencies.

ECB President Mario Draghi said on Tuesday that he is open to “non-standard” monetary tools, and would consider their implementation if needed. Draghi recently said that the ECB could consider a negative deposit rate, and the euro lost ground as a result. Other non-standard measures include long-term lending operations and modifying collateral requirements. Draghi has managed to steer the Eurozone through the worst of the debt crisis, but the zone remains stuck in its longest recession since its creation in 1999. If the ECB does take action and introduces negative rates or other non-standard measures, we could see a sharp reaction from EUR/USD.

G8 summits are often photo-ops with little substance, as confident world leaders reiterate their commitment to take steps to improve the global economy. However, this year’s G8 meeting in Northern Ireland served more than the usual fare, as the G8 leaders used the occasion to announce the start of negotiations on a free trade agreement between the European Union and the United States. The stakes are very high – the EU and US produce 50% of the global output, and a third of world trade. The deal would be the largest bilateral trade pact ever, and could add up to $100 billion to the economies of each partner. Negotiations will get underway in Washington next month, with a deal expected to be signed by the end of 2014.

The Eurozone economy continues to be hampered by low inflation and high unemployment. Although Eurozone inflation did increase to 1.4%, this remains well below the ECB’s target of 2%. The ECB recently lowered interest rates to 0.50% in an attempt to raise inflation and increase economic activity. The labor market situation continues to look grim. Unemployment in the Eurozone has risen to 12%, and is much higher among younger Europeans and in southern countries such as Spain and Greece. The persistent unemployment crisis has led policymakers to declare that the Eurozone unity faces more danger from a social breakdown than from any market forces. With a severe recession affecting many member countries, both small and large, politicians and policymakers will have to find a way to reduce the severe growth and unemployment problems facing the Eurozone if it is to survive.

EUR/USD for Wednesday, June 19, 2013

EUR/USD 1.3389 H: 1.3411 L: 1.3385

EUR/USD Technical

EUR/USD continues to test the 1.34 line on the upside. The pair is facing strong resistance at 1.3477. On the downside, 1.3353 has reverted to a support level. It is a weak line, and see further activity if the dollar shows any strength.

• Current range: 1.3353 to 1.3477

Further levels in both directions:

• Below: 1.3353, 1.3271, 1.3162, 1.3100, 1.3050 and 1.3000
• Above: 1.3477, 1.3586, 1.3690 and 1.3793.

OANDA’s Open Positions Ratio

The EUR/USD ratio is unchanged in Wednesday trading. This is reflected in the pair, which has shown very little movement. Short positions enjoy a substantial majority, indicating strong trader bias towards a downwards move for EUR/USD.

EUR/USD remains within striking distance of the 1.34 line. We could see a holding pattern continue as the markets await the FOMC announcement. Traders should be prepared for some strong movement from the pair after the Fed releases today, especially if there are any developments regarding QE.

EUR/USD Fundamentals

• 9:33 German 10-year Bond Auction. Actual 1.55%.
• 14:30 US Crude Oil Inventories. Estimate 0.5M.
• 18:00 US FOMC Economic Projections.
• 18:00 US FOMC Statement.
• 18:00 US Federal Funds Rate. Estimate <0.25%.
• 18:00 US FOMC Press Conference.

*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.