EUR/USD – Euro Takes Hit as Bernanke Says QE Tightening Likely

EUR/USD is down sharply in Thursday trading, continuing the downward slide which started on Wednesday. The pair has dipped below the 1.32 level in the European session. The euro took a hit on Wednesday, after US Federal Reserve head Bernard Bernanke stated that the Fed would likely begin to wind up the current QE program if the US economy continues to show improvement. Thursday is a busy day, with a host of releases out of Europe and the US. In the Eurozone, PMI numbers were positive, with the exception of German Manufacturing PMI, which missed the estimate. In the US, the markets will get a look at three key releases later today – Unemployment Claims, Existing Home Sales and Philly Fed Manufacturing Index.

Wednesday saw plenty of activity in the currency markets following the FOMC policy statement and remarks by Federal Reserve chair Bernard Bernanke. Bernanke stated that QE would likely be scaled down in 2013, and could be terminated in 2014, if the economy continues to improve. The Fed said it expects the U.S. economy to grow between 2.3% and 2.6% this year, and unemployment should fall to between 6.5% and 6.8% by the end of 2014. This means that if the US economy shows stronger growth and unemployment falls, there is a strong likelihood that the Fed will scale down QE. It should be remembered that the Federal Reserve is not making any changes at present to QE, which involves bond purchases of $85 billion each month by the Fed. Bernanke’s comments boosted the dollar against the major currencies, as winding up QE is dollar-positive. 

Taking a look at the Eurozone, Thursday’s PMI releases were mostly positive, which points to increased economic activity in the Eurozone. However, there was a glaring weak spot as German Manufacturing PMI fell short of the estimate. This PMI has been below the 50 level since February, indicating contraction in the German manufacturing industry. The other German release also disappointed, as PPI declined by 0.3%, missing the  estimate of 0.0%.

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 in May 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 Thursday, June 20, 2013

EUR/USD 1.3196 H: 1.3300 L: 1.3181

EUR/USD Technical

EUR/USD has dropped sharply, and has dipped below the 1.32 line. On the downside, 1.3162 is providing support. This line could face pressure if the euro continues to slump. The next support line is at the round number of 1.3100. The pair is facing resistance at 1.3271. This line has strengthened as the pair trades at lower levels. This is followed by resistance at 1.3353.

• Current range: 1.3162 to 1.3271

Further levels in both directions:

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

OANDA’s Open Positions Ratio

The EUR/USD ratio is moving in the direction of long positions in Thursday trading. This is to be expected, as the sharp drops in EUR/USD since Wednesday have resulted in a large number of short positions being covered, so the percentage of open long positions has increased as a result. We could see this trend in the ratio continue if the euro loses more ground against the dollar.

The euro has taken a strong hit following Bernanke’s comments about QE, shedding about two cents since Wednesday. The day is far from over, with the US releasing three major events. So we could see more volatility from the pair during the day.

EUR/USD Fundamentals

• 6:00 German PPI. Estimate 0.0%. Actual -0.3%.
• 7:00 French Flash Manufacturing PMI. Estimate 47.1 points. Actual 48.3 points.
• 7:00 French Flash Services PMI. Estimate 45.0 points. Actual 46.5 points.
• 7:00 German Flash Manufacturing PMI. Estimate 49.9 points. Actual 48.7 points.
• 7:00 German Flash Services PMI. Estimate 50.1 points. Actual 51.3 points.
• 8:00 Eurozone Flash Manufacturing PMI. Estimate 48.6 points. Actual 48.7 points.
• 8:00 Eurozone Flash Services PMI. Estimate 47.7 points. Actual 48.6 points.
• Tentative – Spanish 10-year Bond Auction. Actual 4.77%.
• All Day – Eurogroup Meetings.
• 12:30 US Unemployment Claims. Estimate 343K.
• 13:00 US Flash Manufacturing PMI. Estimate 52.5 points.
• 14:00 Eurozone Consumer Confidence. Estimate -22 points.
• 14:00 US Existing Home Sales. Estimate 5.01M.
• 14:00 US Philly Fed Manufacturing Index. Estimate -0.6 points.
• 14:00 US CB Leading Index. Estimate 0.2%.
• 14:30 US Natural Gas Storage. Estimate 89B.

*Key releases are highlighted in bold

*All release times are GMT

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