EUR/USD – Edging Higher after Last Week’s Slide

EUR/USD appears to have steadied after last week’s roller coaster ride, in which the pair was pummeled by the US dollar. The euro is holding its own in Monday’s European session, as it trades in the 1.3030 range. On Friday, US employment news failed to excite the markets, but ISM Non-Manufacturing PMI posted its best performance since March. Monday has only two releases, both out of the Eurozone.

Last week was a rollercoaster ride for the euro, which jumped following news of the fiscal cliff agreement. The euro climbed as high as 1.3299 on Wednesday, but the rally turned out to be very short-lived, as the euro dropped close to the all-important 1.30 level. What happened to the rally which looked so promising? With the fiscal cliff behind us, at least for a short while, the markets refocused on Euro-zone data, and were not impressed with some soft PMI numbers out of the Eurozone. Another factor weighing on market sentiment is the release of the minutes of the December FOMC meeting, where the suggestion was raised to end QE4 sometime in 2013. As quantitative easing is a dollar-negative event, the possibility of an early end to the easing is bullish for the US dollar.

Market sentiment was positive following the fiscal cliff agreement, but more trouble lies ahead. Although both the Senate and House of Representatives passed the deal by large margins, there was plenty of grumbling on both sides of the political divide – perhaps proof that the deal reached was a true compromise. Most notably, the hard-fought agreement failed to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and Republicans have vowed that the government must agree to deep spending cuts before they will agree to raise the debt ceiling. For their part, the Democrats are strongly opposed to cuts to major federal programs such as Medicaid. The IMF has also weighed in, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

Taking a look at fundamentals, Friday’s US employment numbers brought no surprises. Non-Farm Employment Change rose to 155 thousand, which was slightly above the estimate of 150K. The Unemployment Rate edged up from 7.7% to 7.8%. However, the November rate was revised to 7.8%, so there was actually no change. ISM Non-Manufacturing climbed to 56.1 points, its best reading since March. This easily beat the estimate of 54.2 points. Monday saw just two releases, both out of the Eurozone. Eurozone Sentix Investor Confidence posted another decline, but managed to post its numbers since July 2011. The indicator came in at -7.0 points, well above the forecast of -13.7. Eurozone PPI declined by -0.2%, a notch lower than the estimate of -0.1%.

As we move into 2103, the markets are closely Europe’s banking sector, which has been hard hit by the debt crisis. This dire situation has led to a sharp drop in the amount of bank loans to private households. Such loans dropped by 0.8% in November compared to a year ago, after a similar decline in October. The ECB is clearly worried, and blames this trend on weak confidence in the Eurozone economy and increased aversion to risk. Analysts expect credit demand to continue to be weak, and note that the ECB’s decision to cut its deposit rate to zero percent has not boosted bank lending to the private sector. On the flip side, the Eurozone M3 indicator, which measures the amount of money in circulation, jumped by 3.8% in November. This could be an indication that more inflation is on the way in 2013, which could affect interest rates and the value of the euro.

EUR/USD for Monday, January 7, 2013

EUR/USD January 7 at 10:35 GMT
1.3043 H: 1.3049 L: 1.3034

EUR/USD Technical

S3 S2 S1 R1 R2 R3
1.2890 1.2960 1.30 1.3030 1.3080 1.3130

EUR/USD has halted last week’s losses, and has reversed direction in Monday’s trading. 1.3030 is providing support to the pair. This line is weak, and could see some activity if the euro shows any weakness. This is followed by the critical line of 1.30, which also carries psychological significance. On the upside, 1.3080 is providing resistance. The next resistance line is 1.3080.

Current range: 1.3030 to 1.3080.

Further levels in both directions:
• Below: 1.3030, 1.30, 1.2960, 1.2890, 1.28, 1.2750, 1.2690 and 1.2624.
• Above: 1.3130, 1.3180, 1.3240, 1.3180, 1.3130, 1.3280 and 1.3350.

OANDA’s Open Position Ratios

With EUR/USD taking a break from last week’s volatility, the ratio is showing little movement. Trader sentiment continues to be strongly biased towards short positions, an indication that most traders expect the euro to lose further ground. However, the euro has managed to reverse last week’s sharp slide, and is comfortably above the 1.30 line.

EUR/USD is fairly steady as we begin the trading week. This is in sharp contrast to last week, where the pair showed strong movement in both directions. The markets did not react to Friday’s releases, and with only a couple of readings today, we could see a very quiet day for the pair.

EUR/USD Fundamentals
• 9:30 Eurozone Sentix Investor Confidence. Estimate -13.7 points. Actual -7.0 points.
• 10:00 Eurozone PPI. Estimate. -0.1%. Actual -0.2%

*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.

Kenny Fisher

Kenny Fisher

Market Analyst at OANDA
A highly experienced financial market analyst with a focus on fundamental and macroeconomic analysis, Kenny Fisher’s daily commentary covers a broad range of markets including forex, equities and commodities. His work has been published in major online financial publications including, Seeking Alpha and FXStreet. Kenny has been a MarketPulse contributor since 2012.