EUR/USD – Euro Retracting After Spectacular Gains

EUR/USD has lost ground on Monday, as the pair trades slightly above the 1.08 line in the European session. After posting huge gains on Thursday and climbing close to the 1.10 line, the euro has since retracted. Taking a look at economic events, German Industrial Production posted a weak gain of 0.2%. Eurozone Sentix Investor Confidence rose to 15.7 points, but was short of the forecast of 17.2 points. In the US, it’s a quiet start to the week, as there are no key events on the schedule.

All eyes were on Friday’s Nonfarm Payrolls report, given the expectation for a rate hike next week. The key indicator dropped to 211 thousand in November, but still beat the estimate of 201 thousand. This indicator is often a market-mover, and the positive reading will lend support to Federal Reserve policymakers who are in favor of raising interest rates later this month. The Federal Reserve will obviously not confirm a widely-expected rate hike, but Fed chair Janet Yellen testified on Capitol Hill on Thursday, and signaled that a rate increase is likely in December, barring some unforeseen weak economic data before the rate decision on December 16. Earlier in the week, Yellen added that the Fed is satisfied with the progress shown by the US labor market. Persistently low inflation levels have hampered the recovery and are well below the Fed target of 2 percent, and is a key reason why the Fed did not raise rates earlier this year. However, Yellen stated that she expects inflation numbers to improve, so weak inflation is unlikely to be an impediment to an historic rate hike, with Fed Funds futures pricing in a 79% chance of an increase.

Mario Draghi often finds a way to surprise the markets, and last week he sent the euro surging thanks to the rabbit he didn’t pull out of his pocket. The markets had expected some significant monetary measures from the ECB, but the central bank opted to play it safe, and merely tweaked current monetary policy. The ECB announced that the interest on deposits would be lowered from -0.20 percent to -0.30 percent, and the QE asset purchase program of EUR 60 billion/year would be extended for an additional six months, to March 2017. Given the lethargic Eurozone economy, the markets had expected much more, such as a substantial increase to the asset purchase program or reductions to other interest rates. The lack of any substantial moves by the ECB clearly caught the markets by surprise, and the euro not only dodged a bullet, but responded with gains of some 3 percent against the dollar, its sharpest jump since March 2009. The euro came close to the 1.10 line before settling down and closing at 1.0920. However, the euro has since reversed directions and given up about 100 points since Thursday. Will these minor steps help a struggling Eurozone? The Eurozone economy is in deep trouble, beset by inflation, high unemployment and weak growth. Germany, the bloc’s largest economy, although in better shape than the rest of the bloc, has also been affected by the malaise which has hit the continent. The euro may have received a pass for now, but could slide towards parity, especially if the Federal Reserve raises rates next week, as is widely expected.

US PMIs reports, which are key gauges of economic activity, had a rough week. On Tuesday, ISM Manufacturing PMI slipped to 48.6 points in November. This figure fell short of the estimate of 50.6 points, and marked the first contraction of the index since May 2013. Recent manufacturing releases were also soft, as the US manufacturing sector continues to struggle. There wasn’t any relief from ISM Non-Manufacturing PMI on Thursday, as the index slipped to 55.9 points, well short of the forecast of 58.1 points. This marked a six-week low for the indicator. The silver lining is that although the index took a hit in November, the reading was still above the 50 line, indicative of expansion.

EUR/USD Fundamentals

Monday (Dec. 7)

• 7:00 German Industrial Production. Estimate 0.8%. Actual 0.2%
• 9:30 Eurozone Sentix Investor Confidence. Estimate 17.2 points. Actual 15.7 points
• All Day – Eurogroup Meetings
• 15:00 US Labor Market Conditions Index
• 20:00 US Consumer Credit. Estimate -18.3B

*Key releases are highlighted in bold

*All release times are GMT

EUR/USD for Monday, December 7, 2015

EUR/USD December 7 at 10:00 GMT

EUR/USD 1.0888 H: 1.0956 L: 1.0858

EUR/USD Technical

• EUR/USD was flat in the Asian session and has posted considerable losses in European trade.
• 1.0847 has weakened in support as the euro continues to lose ground.
• 1.0941 is an immediate resistance line.
• Current range: 1.0847 to 1.0941

Further levels in both directions:

• Below: 1.0847, 1.0732 and 1.0659
• Above: 1.0941, 1.1087 and 1.1172

OANDA’s Open Positions Ratio

EUR/USD ratio is steady on Monday. Long positions are currently a minority (41%), indicative of trader bias towards the euro continuing to lose ground.

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.