EUR/USD – Rangebound Ahead of ECB’s Policy Meeting

EUR/USD is trading in a narrow range, ahead of an ECB policy meeting on Thursday. The markets are not expecting any dramatic developments, and are predicting that the benchmark interest rate of 0.75% will remain unchanged. The pair did not react to Tuesday’s announcement by the Japanese government that it would purchase bonds from the European Stability Mechanism (ESM), starting this week. The Japanese government said that the move would increase stability in the Eurozone and help stabilize the yen. There are four economic releases out of the Eurozone and the US, highlighted by German Industrial Production.

In an important development, Japanese Finance Minister Taro Aso stated on Tuesday that Japan plans to purchase bonds from the European Stability Mechanism, which is the Eurozone’s bailout fund. The ECB was delighted with the news, and said that the ESM would begin issuing immediately. The first debt auction will be on Tuesday, with three-month notes being offered with a value of about 2 billion euros. This will be the first time that the ESM has issued securities since it was formed last October.

Finance Minister Aso said that the move will help bring more stability to the Eurozone, which in turn will also help stabilize the yen and other currencies. Clearly, the Japanese government’s primary motivation is not to save the Euro-zone. The purchase of ESM bonds with yen will allow Prime Minister Shinzo Abe to continue to weaken the Japanese currency (and strengthen the euro at the same time) without sustaining further criticism from the US and other countries, who are worried about the aggressive economic stance of the new government and its call for unlimited easing by the Bank of Japan.

The recent fiscal cliff deal may have improved market sentiment, but it appears that this was just the first of more bruising battles that we could see in the US Congress. The hard-fought agreement, which was preceded by months of acrimony and bad blood between the Republicans and Democrats, was criticized by many analysts and economists as a deal comprised of the lowest common denominator which both sides could reluctantly compromise and agree on. However, the agreement left two critical issues for another day – the debt ceiling and spending cuts. The problem is, the clock on those issues is also winding down, as the debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country’s debt. Otherwise, the real possibility of a US default will likely cause turmoil in the markets.

Taking a look at fundamentals, German numbers continue to be a source of concern. After some positive employment and retail sales numbers, this week’s data has been weak. The Trade Balance surplus dropped to its lowest levels since May, and German Factory Orders fell by 1.2%. The markets are expecting better results from German Industrial Production on Wednesday, but a weak reading could undermine confidence in the Eurozone’s largest economy. Chancellor Angela Merkel is seeking a third term in national elections in September, but she will have her work cut out for her if the German economy fails to improve.

EUR/USD for Wednesday, January 9, 2013

EUR/USD January 9 at 9:40 GMT
1.3080 H: 1.3095 L: 1.3067

EUR/USD Technical

S3 S2 S1 R1 R2 R3
0.8930 0.9015 0.9130 0.9195 0.9275 0.9315
S3 S2 S1 R1 R2 R3
1.30 1.3030 1.3080 1.3130 1.3170 1.3240

EUR/USD was very quiet in Asian trading, and we are seeing more of the same in the European session. The immediate resistance and support lines (R1 and S1 above) continue to remain intact. There is pressure on the 1.3080 line, which has been providing the pair with weak support. This is followed by support at 1.3030. On the upside, there is resistance at 1.3130. This line is steady, but could see activity if the euro shows any signs of upward movement.

Current range: 1.3080 to 1.3130.

Further levels in both directions:
• Below: 1.3080, 1.3030, 1.30, 1.2960, 1.2890, 1.28, 1.2750 and 1.2690.
• Above: 1.3130, 1.3170, 1.3240, 1.3180, 1.3130, 1.3280 and 1.3350.

OANDA’s Open Position Ratios

With EUR/USD boxed in a narrow range, the ratio continues to show little movement. Trader sentiment continues to be strongly biased towards short positions, an indication that most traders expect the euro to lose further ground. Will the euro follow this bias and lose ground against the dollar?

EUR/USD continues to be steady, without much movement. This is in sharp contrast to last week, where the pair shown strong movement in both directions. The markets did not react to the purchase of ESM by the Japanese government, and with few fundamentals scheduled for Tuesday, the drifting could continue.

EUR/USD Fundamentals

• 10:00 Eurozone Final GDP. Estimate -0.1%. Actual -0.1%
• 11:00 German Industrial Production. Estimate 1.1%
• 15:30 US Crude Oil Inventories. Estimate. 0.9M
• 18:00 US 10-year Bond Auction

*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.