EUR/USD – Euro Remains Above 1.36 As US Services PMI Falters

EUR/USD continues to trade just above the 1.36 line as the dollar remains under pressure. The US Services PMI was released on Thursday and the key index disappointed, dropping to a three-month low. On Friday, there are no US economic releases, as Non-Farm Employment Change has been postponed to an undetermined date. FOMC members Dudley and Stein will speak later in the day. In the Eurozone, German and Eurozone PPIs both fell short of their estimates. We’re now into the fourth day of the government shutdown, and there has been no progress towards reaching an agreement on Capitol Hill.

It’s Day 4 of the government shutdown, as the impasse over the budget continues. Democrats and Republicans are entrenched in their positions as each side blames the other for the deadlock. Republicans want a commitment from the Democrats to delay Obamacare before passing a budget, while the Democrats say that there can be no discussions on the heath care legislation before a budget is passed. With the government lacking funds to operate, it has been forced to close non-essential services across the country and send almost a million government workers home. Pressure on both sides to show some flexibility is growing, but so far no progress has been made as the stalemate drags on.

The shutdown remains in the spotlight, but there is a far more serious crisis is lying just around the corner – the debt ceiling. The US has accumulated a debt of $16.7 trillion, and will run out of funds to service the debt by October 17, unless Congress authorizes raising the debt ceiling. Otherwise, the US could potentially default on its obligations, which could cause chaos in the domestic and international financial markets. There was some positive news on Thursday, as House Speaker John Boehner (Republican) apparently told his party that he would allow the Democrats to raise the debt limit. This would avoid another nasty fight in Congress, which is the last thing that the economy and the US dollar need right now.

As widely expected, the ECB maintained its key interest rate at 0.50% earlier this week. There was more interest in the follow-up press conference, which has become more of a market-moving event than the rate announcement. At the press conference, ECB President Draghi downplayed risks to the fragile Eurozone economy, and repeated that interest rates would remain at current or lower levels for an “extended period of time” given the low growth levels and weak inflation in the Eurozone. Friday’s PPI releases underscored the lack of inflation in the Eurozone, as German PPI declined by 0.1%, while Eurozone PPI dropped to a flat 0.0%. Both indexes fell short of the forecast.

There was a lot of expectation that the Federal Reserve would taper QE in September, and the markets were caught by surprise when the Fed balked and maintained the levels of the bond-buying program at $85 billion/mth. However, things have changed dramatically in the past few weeks, with the budget deadlock in Washington, which has shut down the government, as well as growing fears about a debt ceiling crisis. Even if both of these issues were to be resolved quickly, the distortions and delays in key economic data will make it difficult for the Fed to have an accurate, up-to-date picture of the US economy. This will likely rule out any decision to taper QE before the end of the year.

EUR/USD for Friday, October 4, 2013

EUR/USD 1.3601 H: 1.3615 L: 1.3595

EUR/USD Technical

• The euro is trading close to the 1.36 line in Friday trading. The pair has edged lower in the European session.
• EUR/USD continues to face resistance at 1.3649. This is followed by resistance at 1.3786, which has remained intact since November 2011.
• The pair is receiving support at 1.3585. This is a weak line which could fall during the day. The round number of 1.3500 is the next support level.
• Current range: 1.3585 to 1.3649

Further levels in both directions:

• Below: 1.3585, 1.3500, 1.3410, 1.3300, 1.3162 and 1.3100
• Above: 1.3649, 1.3786, 1.3893 and 1.4000

OANDA’s Open Positions Ratio

EUR/USD ratio continues to point to movement towards short positions in Friday trading. This is reflected in the current movement of the pair, as the euro has posted modest losses. The ratio continues to have a solid majority of short positions, indicative of a strong trader bias towards the US dollar climbing to higher ground.

EUR/USD remains strong as it trades close to the 1.36 level. With no US economic data due out on Friday, we could see the pair drift in the North American session.

EUR/USD Fundamentals

• 6:00 German PPI. Exp. 0.1%., Actual -0.1%.
• 9:00 Eurozone PPI. Exp. 0.1%, Actual 0.0%.
• 13:15 US FOMC Member William Dudley Speaks.
• 13:30 US FOMC Member Jeremy Stein Speaks.

*Key releases are highlighted in bold

*All release times are GMT

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