EUR/USD Rises as Doubts surround ECB QE and US Economic Strength

  • U.S. GDP disappoints but market awaits Friday’s NFP before declaring USD weakness
  • China PMI slips into contraction
  • Greek PM seeking ECB agreement as end of February deadline approaches
  • Reserve Bank of Australia anticipated to ease on Tuesday


The euro is rising on the greenback on Monday as investors react to central bank interventions, economic growth forecasts, and the escalating political uncertainty across the eurozone.

The European Central Bank (ECB) remains in the spotlight after launching its expected quantitative easing (QE) program last week to boost the euro region’s economy and stave off deflation. Meanwhile, the political intrigue in Greece is forcing that country’s newly elected prime minister to rebuild bridges he burned a week ago during his victory celebration.

Stateside, the latest U.S. gross domestic product (GDP) figure disappointed by missing the 2014 fourth-quarter forecast. In the fourth quarter, the U.S. economy expanded at a rate of 2.6% versus a 3% forecast. It’s a busy week for currency and commodities traders that will end with Friday’s market-moving U.S. nonfarm payrolls (NFP) report.

ECB Confirms Greek Banking Drama Deadline

ECB Governing Council member Erkki Lükanen said that Greek banks would be cut off from ECB lending if a deal isn’t reached. The bailout agreement talks that Greek Prime Minister Alexis Tsipras wishes to renegotiate will not start until May but the ECB has made it clear the current deal has to be honored to continue to provide liquidity to the embattled Greek banks. An estimated €11 billion ($12.5 billion) was withdrawn in January as the election outcome become clearer.

Angela Merkel, Germany’s chancellor, has avoided direct contact with Tsipras preferring instead to communicate via statements to the press. Tsipras has not made many friends in Germany with his first actions after winning a landslide election. His choice of cabinet appointees and his comments on Greece’s bailout have put him on a collision course with the German leader. Merkel’s goal is to try and isolate Tsipras although the anti-austerity movement continues to gain allies across the eurozone. The most prominent supporters can be found in the Spanish left-wing political party Podemos, which leads in Spain’s latest polls, and with Italian Prime Minister Matteo Renzi. Germany is questioning Tsipras’s pledge to cut Greece’s debt in half, and is even more skeptical about the ability of the new government in Athens to raise exceptional funds from long-time ailments such as corruption and tax evasion while backtracking on privatization.

Aussies Expected to Ease
The Reserve Bank of Australia (RBA) meeting on Tuesday will be a key event this week as the market is pricing in a 65% chance the central bank will lower the cash rate by 25-bps to 2.25%. The RBA has held rates at 2.5% since August 2013 and will likely ease to boost the nation’s employment picture as it battles declining exports due to the China’s slower growth.

Central Banks to Watch This Week
Turkey’s central bank is considering an extraordinary meeting to cut interest rates. Policymakers will make a decision Tuesday, when the state statistics agency will unveil the January inflation rate. Depending on the “strength of disinflation we will decide whether to call a meeting or not,” Governor Erdem Basci told reporters on the sidelines of a conference. The rate of inflation is a concern and politicians are asking for a proactive action from the central bank even as the TRY continues to depreciate as it has lost 5% versus the USD in 2015.

The Bank of England (BoE) is expected to hold rates during its rate announcement on Thursday. The last rate vote by the Monetary Policy Committee was unanimous to hold the benchmark rate at record low. Caution over the global macroeconomic picture and the outcome the U.K. elections in May will probably keep the BoE on the sidelines.

Reserve Bank of New Zealand Governor Graeme Wheeler will be speaking to an Employer’s Chamber of Commerce. A regular activity as part of his tenure guiding New Zealand’s central bank, but with the current emphasis on surprise actions from policymakers in 2015, the market will closely scrutinize his words when he talks about the NZD.

Global Economic Growth Fears Spike

The Chinese manufacturing sector suffered a setback in January as the HSBC purchasing managers’ index (PMI) came in below 50. The January reading was 49.7 compared to 49.6 in December. A slight improvement but still below what would be considered an expansion of the sector. Given the U.S. miss of fourth-quarter GDP growth on Friday, the market will be on the lookout for indicators that validate the slowdown narrative. The weaker China PMI also puts pressure on the People’s Bank of China. Previous mini-stimulus measures have only had mixed results. It might be time for a deeper intervention.

Nonfarm Payrolls Highlights this Week

The GDP numbers out of the United States disappointed by missing the 2014 fourth-quarter forecast. Taken out of context, it looks like the U.S. economy is struggling and the immediate market reaction did not take into account global financial markets. Growth forecasts have been cut around the world so it should not be a total surprise that after an impressive third quarter the U.S. would slow down. Corporate investment was low, and with the price of oil at current levels, it is prompting energy companies to close unprofitable wells and delay new development projects.

Friday’s NFP will capture the attention of the market as the U.S. economy continues to be an oasis in the dessert of economic uncertainty. The U.S. Federal Reserve has indicated that future policy decisions are “data dependent” and that the focus will be on the entire NFP report, not just the headline numbers.

Average hourly earnings disappointed last month and the market took it as a sign that the Fed would delay its interest-hike schedule. The central bank can afford to be patient and only the sustained growth of the U.S. economy can pressure it into quick-starting a tightening cycle.

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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza