EUR/USD has settled down after posting sharp gains at the start of the week. The pair was unchanged on Tuesday, and is trading quietly in the mid-1.30 range in Wednesday’s European session. In economic news, Spain is on a roll, as Spanish Services PMI hit its highest level in almost two years. However, Italian and Eurozone Services PMIs both missed the estimates. Eurozone Retail Sales looked weak, dropping to a four-month low. There are two key releases out of the US later today - ADP Non-Farm Employment Change and ISM Non-Manufacturing PMI.
Spanish numbers continue to impress the markets, as the country has posted three strong readings this week. On Wednesday, Services PMI climbed from 44.4 to 47.3 points, its strongest showing since July 2011. That was the last time that the PMI was above the 50-point level, so the services sector has been contracting for almost two years. Earlier in the week, Manufacturing PMI jumped from 44.7 points to 48.1 points, and Unemployment Change, pointed to 98 thousand less claims, a record for the month of May. Prime Minister Mariano Rajoy, whose government is deeply unpopular due to a strict austerity program, could get some much-needed breathing room from these positive numbers. The Spanish PM has said that the worst of the crisis is over, and will likely point to these figures as proof that the Spanish economy is slowly but surely on the way to recovery.
Will the Federal Reserve scale back QE? Although the Fed hasn’t made any changes so far, Fed policymakers, including Fed Chair Bernanke, continue to hint that QE could be scaled back in the next few months. With the US continuing to alternate between good and bad economic releases, the Fed may continue to hold off on any changes to QE before it is convinced that the US economy is improving. The currency markets have reacted sharply to talk about terminating QE, and any moves related to QE will likely impact EUR/USD.
The ECB will make a rate announcement on Thursday, and that could mean some volatility for the euro. EUR/USD reacted sharply after recent ECB policy meetings, even though interest rates were left untouched, and this could happen again. ECB head Mario Draghi and other policy makers have hinted that they are open to negative interest rates. The ECB’s deposit rate currently stands at zero, and if the ECB decides to go lower, it would be the first central bank to introduce negative interest rates. Such a move would could hurt the euro, as investors would likely look outside the Eurozone to get better rates elsewhere. We can expect some movement from EUR/USD if the ECB mentions negative rates.
EUR/USD June 5 at 10:30 GMT
EUR/USD 1.3064 H: 1.3108 L: 1.3054
EUR/USD continues to trade in a narrow range, and the proximate resistance and support levels remain in place (R1 and S1 above). On the downside, 1.3050 continues to provide support. This is a weak line, and could be tested if the dollar shows any improvement. The next line of support is at the round number of 1.30. On the upside, 1.3100 is providing resistance. This important line was breached in the Asian session, but the pair has since retracted to the mid-1.30 line. This is followed by resistance at 1.3162.
- Current range: 1.3050 to 1.3100
- Below: 1.3050, 1.3000, 1.2955, 1.2843 and 1.2753
- Above: 1.3100, 1.3162, 1.3271 and 1.3353
EUR/USD ratio continues to point to movement towards short positions. Although the pair is currently showing little movement, the activity in the ratio could be an early indication that the US dollar will break out and post gains at the expense of the euro. Trader sentiment continues to be biased towards the US dollar improving, as a majority of the open positions are short.
The euro started the week with a bang, but has since gone quiet, with very little movement since Monday. We could see some activity from the pair later today, as the US releases key employment numbers and a non-manufacturing PMI.
EUR/USD Fundamentals
- 7:15 Spanish Services PMI. Estimate 45.3 points. Actual 47.3 points.
- 7:45 Italian Services PMI. Estimate 47.5 points. Actual 46.5 points.
- 8:00 Eurozone Final Services PMI. Estimate 47.5 points. Actual 47.2 points.
- 9:00 Eurozone Retail Sales. Estimate -0.2%.
- 9:00 Eurozone Revised GDP. Estimate -0.2%.
- 12:15 US ADP Non-Farm Employment Change. Estimate 171K.
- 12:30 US Revised Non-Farm Productivity. Estimate 0.7%.
- 12:30 US Revised Unit Labor Costs. Estimate 0.5%.
- 14:00 US ISM Non-Manufacturing PMI. Estimate 53.4 points.
- 14:00 US Factory Orders. Estimate 1.6%.
- 14:30 US Crude Oil Inventories.
- 18:00 US Beige Book.