EUR/USD – ECB Gives Cyprus Ultimatum

The US dollar continues to put pressure on the euro in Friday trading, as the Cyprus bailout crisis worsens. Responding to Cyprus’ rejection of a bailout agreement, the ECB announced on Thursday that it would cease providing financial support to the country’s banks next week, unless a new agreement on a rescue package was reached. In economic news, there were a host of releases on Thursday. In the Eurozone, there was disappointment as PMI numbers out of Germany, France and the Eurozone all fell below expectations. The news was better out of the US, as Unemployment Claims and the Philly Fed Manufacturing Index were positive. Existing Home Sales was up slightly from the previous reading, but still missed the market estimate. Friday is much quieter, with just two releases, both out of the Eurozone. German Ifo Business Climate, a key release, fell below the estimate.

The latest Eurozone financial crisis is centered in one of the Eurozone’s smallest members. Last weekend Cyprus signed onto a 10 billion euro bailout package, courtesy of the EU and IMF. Under the agreement, all bank deposits would be taxed, between 6-10%, depending on the size of the bank deposit. This tax was supposed to raise about 6 billion euros. Cypriots were outraged, and on Tuesday, parliament voted overwhelmingly against the bailout deal, despite the government’s pleas that rejecting the agreement could lead to a bank collapse. The ECB shot back, and has threatened to stop providing emergency liquidity to Cypriot banks as of Monday, unless an agreement is reached for a new rescue package. So who will blink first – struggling Cyprus or the ECB? Without these funds, Cyprus could experience a financial meltdown, and there is even talk of the island country exiting from the Eurozone.

Looking at economic releases out of the Eurozone, PMI data was a big disappointment. In France, Manufacturing PMI came in at 43.9 points and Services PMI at 41.9, both of which were below expectations. It was the same story with Eurozone PMIs, as the Manufacturing PMI came in at 46.6 points and Services PMI at 46.5. German Manufacturing PMI, a key indicator, dropped below the 50-point level to 48.9 points, indicating contraction. German Services PMI managed to stay above the 50-point threshold at 51.6 points, but this was well below the estimate of 54.9 points. These weak numbers point to ongoing weakness in the Eurozone economy, but what is especially worrying is the German data, which points to trouble in the Eurozone’s largest economy. On Friday, there was more bad news out of Germany, as the German Ifo Business Climate dropped to 1.06.7 points, missing the estimate of 107.8 points.

US Federal Reserve head Bernard Bernanke had no surprises as the Fed maintained interest rates and the current round of asset purchases. The benchmark interest rate remains at 0%-0.25%, and the Fed will continue to purchase $85 billion in assets each month. There had been speculation that the Fed might modify its monetary policy as the economy as shown signs of improvement and unemployment has dipped lower. However, Bernanke stated that the labor market was still weak and also noted concern about recent tax increases and federal spending cuts. On Thursday, US releases continued to provide more good news. Unemployment Claims were up slightly to 336 thousand, but beat the estimate of 343 thousand. This was the fourth week in a row that the key employment indicator has beaten expectations. There was good news as well from the manufacturing sector, as the Philly Fed Manufacturing Index climbed to 2.0 points, beating the estimate of -1.6 points. Existing Home Sales was up slightly from the February reading to 4.98 million, but fell short of the estimate of 5.02 million. Overall, the numbers were solid and reinforce the sentiment that the US recovery is deepening.

EUR/USD for Friday, March 22, 2013

1.2927 H: 1.2939 L: 1.2889

EUR/USD Technical

EUR/USD was trading below the 1.29 line in the Asian session, and crossed above it in European trading. The pair is receiving support at 1.2882. This line which could face pressure if the euro loses ground. There is stronger support at 1.2802. On the upside, 1.2950 is providing weak resistance. It is followed by a stronger line at the round number of 1.3000.

• Current range: 1.2882 to 1.2990.

Further levels in both directions:

• Below: 1.2882, 1.2802, 1.2757 and 1.2683
• Above: 1.2950, 1.3000, 1.3080, 1.3130, 1.3170 and 1.3280

OANDA’s Open Position Ratios

The EUR/USD ratio is showing strong movement in Friday trading, in the direction of long positions. This is reflected in the current movement of the pair, as the euro has climbed above the 1.29 line and has made modest gains against the US dollar. The ratio is close to an even split between long and short positions, as trader sentiment is divided as to which way the pair will move.

The highlight of the week has been the Cyprus bailout, which is weighing on the euro. As well, PMI data out of the Eurozone was awful this week. The euro is likely to remain under strong pressure, as it struggles to stay above the 1.29 level.

• 9:00 German Ifo Business Climate. Estimate 107.8 points. Actual 106.7 points.
• 14:00 Belgium NBB Business Climate. Estimate -10.3 points.

*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.