EUR/USD – ECB Lowers Rates to 0.50%, Euro Falls

In a dramatic but widely-expected move, the ECB lowered its key interest rate on Thursday by 0.25%, bringing the rate to a record low of 0.50%. After initially rising, the euro slumped, dropping over a cent on Thursday. EUR/USD has partially recovered, and pushed above the 1.31 line early in the European session. Turning to economic news, US releases looked good on Thursday, as Trade Balance and Unemployment Claims beat expectations. EUR/USD could be in for a busy Friday, with three key events on the schedule – Non-Farm Payrolls, the Unemployment Rate and ISM Non-Manufacturing PMI.

On Thursday, the ECB pulled the trigger and reduced interest rates to 0.50%, a record low. The rate had been pegged at 0.75% since July 2012. The move was widely expected, as the Eurozone economy remains in poor shape, and many of the major European economies are in recession. However, the euro initially moved higher before dropping sharply. The catalyst for the drop was comments by ECB head Mario Draghi that he was considering a negative deposit rate for banks. The deposit rate, which is what the ECB pays Eurozone banks for overnight deposits, currently stands at 0%. A negative rate could lead to funds flowing out of the Eurozone, and the euro was down more than one cent on Thursday as a result.

The markets were delighted that Italy has finally put together a government, and Italian releases have looked solid this week. Although the new government will have to deal with a troubled economy, there were some hopeful signs. Italian 10-year bonds fell, dropping below 4%. This is an important sign of renewed investor confidence in the Italian economy. There was more good 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, beating the estimate of 44.9 points. Strong releases out of the Eurozone’s third largest economy will give a lift to both the Eurozone and the euro.  

The US has been weighed down with poor releases since late March, so Thursday’s solid numbers were welcome news. The US trade deficit narrowed from $43.0 billion to $38.8 billion, easily beating the estimate of $42.1 billion. A well, Unemployment Claims were 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.

Anyone who was expecting some dramatic news out of the Fed on Wednesday was sorely disappointed. The FOMC policy statement on Wednesday said little, as the Fed basically noted that it wasn’t willing to take further steps, despite signs of weakness in the US economy. There was no indication that the Fed would make any changes (higher or lower) to its current QE program of purchasing $85 billion in assets each month. The Fed did criticize the government’s economic policy, stating that current fiscal policy was restraining economic growth.

EUR/USD for Friday, May 3, 2013

EUR/USD 1.3132 H: 1.3136 L: 1.3061  

EUR/USD Technical

 EUR/USD has bounced higher on Friday, following sharp losses yesterday. The pair continues to receive support at the round number of 1.3100. This is followed by a support level at 1.3050. On the upside, the pair is testing 1.3170. There is stronger resistance at 1.3240.

• Current range: 1.3100 to 1.3170

  Further levels in both directions:

• Below: 1.31, 1.3050, 1.3000, 1.2960 and 1.2880
• Above: 1.3170, 1.3240, 1.3306, 1.3398 and 1.3479

  OANDA’s Open Positions Ratio

The EUR/USD ratio is pointing to movement towards long positions in Friday trading. This is reflected in the pair’s current movement, as the euro has made some gains in crossed above the 1.31 level. Short positions continue to command a strong majority, indicative of a strong trader bias toward the dollar reversing direction and moving higher.

We’re being treated to some volatility from EUR/USD, as the pair took a hit on Thursday but has reversed directions and is moving higher. We could see further action during the day, as the US releases key employment numbers and a non-manufacturing PMI.

 EUR/USD Fundamentals

• 9:00 EU Economic Forecasts.
• 9:00 EU PPI.
• 12:30 US Non-Farm Employment Claims. Estimate 146K.
• 12:30 US Unemployment Rate. Estimate 7.6%.
• 12:30 US Average Hourly Earnings. Estimate 0.2%.
• 14:00 US ISM Non-Manufacturing PMI. Estimate 54.1 points.
• 14:00 US Factory Orders. Estimate -2.8%.
• 16:30 US Federal Reserve Governor Daniel Tarullo Speaks.

 *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.