EUR/USD September 5 Drops, then Recovers after Weak Euro-zone,

EUR/USD is showing some volatility following weak Service PMIs out of the Euro-zone and Germany. As well, Euro-zone Retail Sales declined for the first time since June. The markets will be expecting some concrete action from the ECB as it holds an important policy meeting on Thursday. Today’s highlights include the German 10-year Bond Auction and the US Revised Nonfarm Productivity.

Here’s an update about technical lines, fundamental indicators and sentiment regarding EUR/USD.

EUR/USD Technical

• Asian session: Euro/dollar dropped to 1.2502, and consolidated at 1.2506. The pair has moved upwards in the European session.
• Current range: 1.2520 to 1.2587.

Further levels in both directions:  

• Below: 1.2520, 1.2440, 1.24, 1.2360, 1.2330, 1.2250, 1.22, 1.2144, 1.2043, 1.20, 1.1876 and 1.17.
• Above: 1.2587, 1.2623, 1.2670, 1.2743 and 1.2814.
• 1.220 is providing weak support.
• 1.2587 is the next resistance line, 1.2623 is stronger.

Euro/Dollar weaker following poor Service PMI data – click on the graph to enlarge.

EUR/USD Fundamentals

• 7:15 Spanish Services PMI. Actual 44.0 points.
• 7:45 Italian Services PMI. Actual 44.0 points. Exp. 43.3 points.
• 8:00 Euro-zone Final Services PMI. Actual 47.2 points. Exp. 47.5 points.
• 9:00 Euro-zone Retail Sales. Exp. -0.2%. Actual -0.2%.
• Tentative: German 10-year Bond Auction.
• 12:30 US Revised Nonfarm Productivity. Exp. +1.8%.
• 13:00 US Revised Unit Labor Costs. Exp. +1.5%.

EUR/USD Sentiment

•  “R” word surfaces after weak Retail Sales, Service PMIs: Euro-zone Retail Sales fell by 0.2%. Although this figure matched the market forecast, this is a worrisome reading, as it is the first decline since June. Euro-zone and German Service PMIs also contracted, leading a senior analyst to conclude that the EZ is on track to fall back into technical recession in Q3.
• Draghi’s remarks leaked: ECB President Mario Draghi must be more than annoyed after his remarks at a “closed” parliamentary meeting in Brussels were leaked and subsequently splashed all over the media. spoke to a parliamentary committee in Brussels on Monday. At the meeting, Draghi provided some details about the ECB’s bond buying plan, including an option to buy 3 year bonds – 3 years is also the length of the ECB’s LTRO. On September 6, the ECB convenes for an important policy meeting and the interest rate announcement. The markets will be expecting some concrete proposals, and failure to deliver could sour market sentiment and send the euro tumbling.
• Fed remains on sidelines: In a highly-anticipated speech at the central bankers’ meeting in Jackson Hole, Fed chief Bernanke dished out little more than what he’s been saying for months – the Fed was closely monitoring the US economy, and was willing to intervene and stimulate the economy with easing measures if conditions worsened. The bottom line? The Fed will stick to the sidelines and there will be no QE3 in September.
• German Court to Rule on ESM: On September 12th, Germany’s Constitutional Court will hand down a decision on the legality of the European Stability Mechanism as it stands for Germany.  The court’s ruling is required in order to ratify the ESM proposal by EU officials. Opponents to the ESM say it is unconstitutional and will harm Germany’s economy. The Court is expected to vote in favor of the proposal, but we could see some fluctuation by the euro in the days prior to the decision, as a rejection of the proposal would be disastrous for the currency.
• German officials grumble over Greek bailout: German grumbling is growing over Greece’s request for an extension, and a senior member of the Christian Social Union, a coalition partner, said he saw Greece leaving the euro next year. Other coalition partners are dead set against providing Greece with more time or money. The Troika will be meeting again with Greek officials later this month, and speculation over a Greek exit is bound to heat up. See how to trade the Grexit with EUR/USD.
• Spain continues to struggle: After Catalonia asked for 5 billion euros of aid, also its southern neighbor joined in. This adds pressure on the central government to hurry up and ask for aid. In an ominous development, a senior Spanish military officer threatened that any unilateral steps by Catalonia towards independence would be met with military force. Meanwhile, there was more bad news on the economic front, as the number of unemployed people rose 0.8% in August. This was the first increase in five months, and with the tourist season winding down, we could see another weak release for September.
• Bond markets want ECB to take action: Spanish and Italian yields are fairly steady in anticipation of the ECB blitz. Thursday’s Italian 10-year bonds are hovering around  5.82%, down from 5.96% in July. Recent Spanish 10-year yields are in the 6.65% range. This is certainly an improvement from the unsustainable rates above 7% which we saw in the summer. However, lots of talk and no action from the ECB this week could undermine investor confidence and send Spanish and Italian yields back up to dangerous levels.

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