EUR/USD June 21 – Struggling after QE Announcment by Fed

EUR/USD continues to point downward, as the pair tests the 1.32 line. The euro has dropped sharply since Wednesday, as the US Federal Reserve announced that it plans to scale down the current QE program sometime in 2013. There was plenty of action on Thursday, as both the Eurozone and US produced mixed numbers. The week is ending on a quiet note, as there is only one release on the day – Eurozone Current Account. This indicator was well above the estimate.

Here is a quick update on the technical situation, indicators, and market sentiment that moves euro/dollar.

EUR/USD Technical

• Asian session: Euro/dollar edged higher, climbing to a high of 1.3254. The pair consolidated at 1.3245. In the European session, Euro/dollar has moved lower, putting more pressure on the 1.32 line.

Current range: 1.32 – 1.3255.

Further levels in both directions:  

• Below: 1.32, 1.3160, 1.31, 1.3050, 1.30, 1.2940, 1.2890, 1.2840, 1.28, 1.2750 and 1.27.
• Above: 1.3255, 1.3350, 1.34, 1.3434, 1.3480, 1.3580 and 1.3710.
• The pair has been testing 1.32 but it continues to provide weak support. 1.3160 is next.
• On the downside, 1.3254 was tested in the Asian session, but remains intact. 1.3350 is stronger.

Euro struggling after FOMC announcement, weak German data – click on the graph to enlarge.

EUR/USD Fundamentals

• 8:00 Eurozone Current Account. Exp. 15.1B. Actual 19.5B.
• All Day ECOFIN Meetings.

For more events and lines, see the Euro to dollar forecast

EUR/USD Sentiment

• Dollar Jumps as Fed plans to taper QE: The currency markets have been buzzing since late Wednesday, following confirmation from the Federal Reserve that it plans to scale down QE. The Fed said that the current purchase levels of $85 billion will remain in place, but if the economy continues to improve, the program would be scaled down in 2013, and could be terminated in 2014. The Fed said it expects the U.S. economy to grow between 2.3% and 2.6% this year, and unemployment should fall to between 6.5% and 6.8% by the end of 2014. These figures are not edged in stone, so even if GDP and unemployment does not reach these precise numbers, there is a strong likelihood that the Fed will scale down QE. Since QE is dollar-negative, Bernanke’s comment about reducing QE boosted the dollar against the major currencies. The euro has taken a wallop, losing close to two cents since Wednesday.
• Eurozone PPIs positive, but Germany disappoints: Eurozone PMIs were released on Thursday, and the news was mostly positive, as most of the releases beat their estimates. However, the one glaring exception was German Manufacturing PMI, which lost ground in the June release, and missed the estimate. This PMI has been below the 50 level since February, indicating contraction in the manufacturing industry. German PPI also disappointed, declining by 0.3%. The estimate stood at 0.0%. The markets continue to be concerned about the German economy, which has been churning out mixed numbers for quite some time. Germany is the largest economy in the Eurozone, and if the “locomotive of Europe” does not lead the way, there is little chance of the Eurozone being able to recover from the present recession.
• US numbers a mix: The markets had plenty of material to work with on Thursday, as the US released three key events. Unemployment Claims disappointed, coming in at 354 thousand, well above the estimate of 343 thousand. There was better news as Existing Home Sales improved nicely to 5.18 million, easily surpassing the estimate of 5.01 million. The Philly Fed Manufacturing Index, which has been erratic, shot up to 12.5 points from -5.2 points. This blew past the estimate of -0.6 points, and was the key indicator’s best showing since March 2012. We continue to see ups and downs from US economic indicators, making it difficult to gauge the extent of the US recovery.
• Draghi open to unconventional measures: ECB President Mario Draghi reiterated in a speech earlier this week that he is open to “non-standard” monetary tools, and would not hesitate to use such measures if needed. Draghi hinted recently that a negative deposit rate was on the table, and the markets reacted negatively, as the euro took a hit. Other measures include long-term lending operations and modifying collateral requirements. Draghi is widely credited for his role in keeping the struggling Eurozone intact and afloat in difficult times, but still has his work cut out for him, as the Eurozone is now mired in its longest recession since the zone was created in 1999. If the ECB does take steps to introduce negative rates or other non-standard measures, we can expect a sharp reaction from the currency markets.
• High unemployment, low inflation bedevil Europe: The Eurozone economy continues to sputter, and a large part of the problem is low inflation and high unemployment. Last week’s inflation numbers in the Eurozone were up slightly, coming in at 1.4%. However, this remains well below the ECB’s target of 2%. The ECB recently lowered interest rates to 0.50%, hoping to raise inflation and increase economic activity. Unemployment in the Eurozone has risen to 12%, and is much higher among younger Europeans. The persistent unemployment crisis has led policymakers to declare that the Eurozone unity faces more danger from a social breakdown than from any market forces. With a severe recession affecting many members, politicians and policymakers will have to find a way to tackle the severe growth and unemployment problems facing the Eurozone if it is to remain intact.