EUR/USD Aug. 9 Loses Ground as ECB Revises Down Growth

EUR/USD continues to drop, as the ECB revised its growth outlook downward for 2012. The markets are hoping that the ECB will soon take action to tackle the crippling debt crisis. In particular, there is growing pressure on the central bank to take steps to cut borrowing costs in Spain and Italy. In economic news, the US Trade Balance and Unemployment Claims will be released on Thursday, and the markets are expecting both of these key releases to improve from their previous reading.

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

EUR/USD Technical

• Asian session: Euro/dollar reached a high of 1.2388, and consolidating at 1.2374. The pair is down in the European session.
• Current range: 1.2330 to 1.2360.

Further levels in both directions:  

• Below: 1.2330, 1.2288, 1.22, 1.2144, 1.2043, 1.20, 1.1876 and 1.17.
• Above: 1.2360, 1.24, 1.2440, 1.2520, 1.2623, 1.2670, 1.2743 and 1.2814.
• 1.2360 is providing weak resistance.
• 1.2330 is being tested, with 1.2288 the next line of support.

Euro/Dollar lower after ECB revises growth downward – click on the graph to enlarge.

EUR/USD Fundamentals

• 8:00 ECB Monthly Bulletin.
• 8:00 Italian Trade Balance. Exp. +0.97B. Actual +2.52B.
• 12:30 US Trade Balance. Exp. -47.4B.
• 12:30 US Unemployment Claims. Exp. 371K.
• 14:00 US Wholesale Inventories. Exp. +0.3%.
• 14:30 US Natural Gas Storage. Exp. 30B.
• 17:00 US 30-y Bond Auction.

EUR/USD Sentiment

•  Pressure growing on ECB to take action:: In its Monthly Bulletin, the ECB revised its forecast of Euro-zone growth in 2012 from -0.2% to -0.3%, but predicted positive growth in 2013 and 2014. This negative news will increase the pressure on ECB head Mario Draghi to take action, especially regarding Italian and Spanish borrowing costs. Draghi recently declared that bond yields are unacceptable, and that the ECB will explore ways to act in the coming weeks. These bond buys would be limited to the short end of the curve, but could be unsterilized – full QE. This is a significant move forward. Opposition came only from Germany, and not from other northern countries. Apart from the exploration, the actions also depend on a formal aid request. The zone’s major players will have to act quickly and put aside differences in order to effectively tackle the debt crisis.
• Negotiations over Greek bailout continue: The EU / ECB / IMF delegation left Athens and said they were making progress in their negotiations with the Greek government. Talks are not scheduled to resume until September, after Greece has a scheduled bond repayment to the ECB. It is unclear where it will get the money from. There is again growing talk in Europe of a Grexit, and the likelihood of this happening before the end of 2012 are rising. Meanwhile, Standard and Poor’s lowered its outlook for Greece from stable to negative, and warned that the country was likely to miss the targets set out in the bailout package, which would increase the possibility of a default.
• No help from Fed: The Federal Reserve refrained from implementing fresh easing measures, despite troubling data from the US economy. The Fed took note that economic growth was stagnant in 2012, and reiterated that it stood ready to act if necessary. This is a repeat of what Bernanke said in the past, and the change of wording is subtle. Talk of QE continues, as some participants see easing coming in December, while others see it even sooner. Earlier this week, Boston Federal Reserve President Eric Rosengren declared that the Fed should implement QE3 in order to help the troubled US economy. Other market players, however, believe that the QE3 camp seems to miss a simple reality.
• German numbers alarm markets: Recent German economic data has been weak, with PMIs, industrial production and manufacturing orders all disappointing the markets. The markets are getting jittery, as a Germany in decline could spell disaster for the struggling Euro-zone and send the euro tumbling. Just to add oil to the fire, Moody’s recently reduced the outlook on Germany, the Netherlands and Luxembourg from stable to negative.
• Spanish regions complicate bailout picture: The euro-zone’s fourth largest economy is trying to focus the crisis on the banks, but its regions are also in deep trouble. No less than 6 regions may ask to tap into the national bailout fund. National sentiment is strongly felt in Catalonia, which banned a budget meeting. The regions are part of the complex picture. Currently, optimism from Draghi has pushed yields lower: 6.77% on the 10 year bonds. This is welcome news, as recent yields were above the dangerous 7% level.
• Debt woes, recession weigh on Italy: Like Spain, Italy is facing spiralling borrowing costs which are a serious threat to the economy. The area’s third largest economy raised money in the markets with a yield of 5.96%, higher than 5.82% seen last time. The economic picture in Italy is grim, as the country is carrying a debt-to-GDP ratio of 123%, and with another GDP decline, has officially been in recession for one full year. Meanwhile, Italian Prime Minister Mario Monti has warned that the disagreements among Euro-zone members are hampering an effective response to the debt crisis and threaten the stability of the EU. The rhetoric between the Italian PM and German officials over what steps to take to tackle the debt crisis seems to be heating up.

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