EUR/USD June 20 – Sharp Drops After Bernanke Says QE Tapering Likely

EUR/USD continues to drop in Thursday trading. The pair dropped over one cent on Wednesday, following remarks by Fed chief Bernard Bernanke that the Fed will likely scale down the current QE program sometime in 2013. The pair continues to fall on Thursday as German PPI and Manufacturing PMI missed their  estimates. In the US, we can look forward to a busy day with the release of three key indicators – Unemployment Claims, Existing Home Sales and Philly Fed Manufacturing Index.

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

EUR/USD Technical

• Asian session: Euro/dollar dropped lower, touching a low of 1.3245. The pair consolidated at 1.3251. The pair continues to fall in the European session and is testing 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 is testing 1.32 on the downside. 1.3160 is the next support level.
• 1.3255 is providing weak resistance. This is followed by 1.3350.

Euro slides after Fed statement on QE – click on the graph to enlarge.

EUR/USD Fundamentals

• 6:00 German PPI. Exp. 0.0%. Actual -0.3%.
• 7:00 French Flash Manufacturing PMI. Exp. 47.1 points. Actual 48.3 points.
• 7:00 French Flash Services PMI. Exp. 45.0 points. Actual 46.5 points.
• 7:00 German Flash Manufacturing PMI. Exp. 49.9 points. Actual 48.7 points.
• 7:00 German Flash Services PMI. Exp. 50.1 points. Actual 51.3 points.
• 8:00 Eurozone Flash Manufacturing PMI. Exp. 48.6 points. Actual 48.7 points.
• 8:00 Eurozone Flash Services PMI. Exp. 47.7 points. Actual 48.6 points.
• Tentative – Spanish 10-year Bond Auction.
• All Day – Eurogroup Meetings.
• 12:30 US Unemployment Claims. Exp. 343K.
• 13:00 US Flash Manufacturing PMI. Exp. 52.5 points.
• 14:00 Eurozone Consumer Confidence. Exp. -22 points.
• 14:00 US Existing Home Sales. Exp. 5.01M.
• 14:00 US Philly Fed Manufacturing Index. Exp. -0.6 points.
• 14:00 US CB Leading Index. Exp. 0.2%.
• 14:30 US Natural Gas Storage. Exp. 89B.

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

EUR/USD Sentiment

• Dollar Jumps as Fed says QE tapering likely: There was plenty of activity in the currency markets late Wednesday, following remarks by Federal Reserve chair Bernard Bernanke with regard to 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 if the US economy does show stronger growth and unemployment falls, 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 plunged, losing about two cents since Wednesday.
• Eurozone PPIs positive, 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%.
• Draghi open to unconventional measures: ECB President Mario Draghi reiterated in a speech on Tuesday 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.
• G8 discusses EU – US Free Trade Agreement: International summits are often long on ceremony and pomp and short on substance. However, this year’s G8 meeting in Northern Ireland was not business as usual, as the leaders used the occasion to announce the start of negotiations on a free trade agreement between the European Union and the United States. The stakes are very high – the EU and US produce half the global output, and a third of world trade. A free trade agreement between the US and the EU would  be the largest bilateral agreement ever, and could add up to $100 billion to the economies of each partner. Negotiations will get underway in early July, and the leaders want to have a deal in place by the end of 2014, certainly an ambitious time frame.
• 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 survive.