EUR/USD July 31 Steady as Markets Eye ECB Policy Meeting

EUR/USD started the week by sliding (July 30th). The head of the ECB and European leaders have pledged to do everything to save the euro, but the markets remain cautious, hoping that the ECB will announce steps to lower Spanish and Italian borrowing costs, which have been reaching dangerous levels. The central bank will be under pressure to announce concrete steps at its Policy Meeting on Thursday. There are a string of releases out of the Euro-zone and the US today. German Retail Sales posted very weak numbers, but German Unemployment Change was slightly better than expected.  Euro-zone Unemployment edged up to 11.2%, as expected. The key release today will be US CB Consumer Confidence.

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

EUR/USD Technical

• Asian session: Euro/dollar dropped to 1.2249, consolidating at 1.2262. The pair is unchanged in the European session.
• Current range: 1.22 to 1.2288.

Further levels in both directions:  

• Below: 1.22, 1.2144, 1.2043, 1.20, 1.1876 and 1.17.
• Above: 1.2288, 1.2330, 1.2360, 1.24, 1.2440, 1.2520 and 1.2623.
• 1.2150, a clear historic separator, continues to provide support.
• 1.2288 is a weak line of resistance, with stronger resistance at 1.2330.

Euro/Dollar steady as markets eye ECB policy meeting – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00 German Retail Sales. Exp. +0.6%. Actual -0.1%.
• 6:45 French Consumer Spending. Exp. +0.2%. Actual +0.1%.
• 7:55 German Unemployment Change. Exp. +9K. Actual +7K.
• 8:00 Italian Monthly Unemployment Rate. Exp. 10.2%. Actual 10.8%.
• 9:00 Euro-zone CPI Flash Estimate. Exp. +2.4%. Actual +2.4%.
• 9:00 Euro-zone Unemployment Rate. Exp. 11.2%. Actual 11.2%.
• 9:00 Italian Preliminary CPI. Exp. +0.3%. Actual 0.0%.
• 12:30 US Core PCE Price Index. Exp. +0.2%.
• 12:30 US Employment Cost Index. Exp. +0.5%.
• 12:30 US Personal Spending. Exp. +0.1%.
• 12:30 US Personal Income. Exp. +0.5%.
• 13:00 US S&P/CS Composite-20 HPI. Exp. -1.5%.
• 13:45 US Chicago PMI. Exp. 52.6 points.
• 14:00 US CB Consumer Confidence. Exp. 61.5 points.
• 20:00 Treasury Secretary Timothy Geithner Speaks.

EUR/USD Sentiment

• Draghi talks tough and raises the stakes: ECB head Mario Draghi, often criticized for not being more aggressive in tackling the debt crisis, was the darling of the markets as he promised to do “whatever it takes to preserve the euro, and believe me, it will matter”. What is urgently needed is massive bond buying of Spanish and Italian debt, among a wide range of options. The markets will be looking for some concrete action when the ECB holds it Policy Meeting on Thursday. See the ECB preview for all the details.
• German opposition: German finance minister Wolfgang Schäuble rejected bond buying by the ECB, and also the conservative central bank in Germany continues rejecting it. The head of the Bundesbank Jens Weidmann and Mario Draghi will meet before Thursday’s decision. Traders should be careful, as there is good reason to be cautious, if not skeptical about what steps the ECB is prepared to take in to tackle the crippling debt crisis affecting the Euro-zone.
• German data continues to disappoint: If the euro still is a new Deutschmark, there are enough reasons to be worried. German Services and Manufacturing PMIs both came in below the market forecast, indicating weakness in those sectors of the economy. This was followed by an awful Business Climate release, as the indicator fell below the market estimate and hit a two-year low in the process. Retail Sales was also well below the market estimate. The markets are clearly getting nervous, as a Germany in decline could spell disaster for the struggling Euro-zone and send the euro tumbling. In addition, Moody’s reduced the outlook on Germany, the Netherlands and Luxembourg from stable to negative.
• Spanish regions weigh on the country: The euro-zone’s fourth largest economy is trying to focus the crisis on the banks, but also its regions are in deep trouble. No less than 6 regions may ask to tap into the national bailout fund. National sentiment is strongly felt in Catalonia. Spanish yields remain at around 7%, and this is clearly unsustainable. Talks about a full sovereign bailout worth 300 billion euros have surfaced. This is in addition to the 100 billion euros earmarked for the banks.
• Greece to run out of money on August 20th: Fears of a Greek exit from the Euro-zone have again surfaced. Greece is already running into difficulty meeting its bailout obligations, such as debt-to GDP targets, and this could jeopardize the bailout funds. Germany continues to take a tough line with Greece, as German Vice Chancellor Philipp Roesler warned that Greece must adhere to austerity measures in order to receive bailout funds. Meanwhile, the troika, comprised of the European Commission, ECB and the IMF, are holding talks with the Greek government in an attempt to resolve the latest crisis. Greece announced new austerity measures, but will it be enough to convince the troika? The country has to pay over 3 billion euros to the ECB on August 20th, and it doesn’t have the money at the moment.
• Italy struggles with yields and debt: Doubts about Draghi’s seriousness can be seen in his own country. 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 specter of early elections in which the anti-euro sentiment will gain traction also weighs on Italy, that now has a debt-to-GDP ratio of 123%.
• US data weak, but not enough for QE3: The US continues to produce weak data, with housing data and durable goods posting weak numbers. Growth was slow in Q2: 1.5% according to the first release. This is a favorable situation for the dollar: data is weak enough to show that the US is not an engine of global growth, but not weak enough to trigger dollar printing from the Fed, which will release its latest decision on Wednesday.The markets may be disappointed once again if the Fed again stays on the sidelines.

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