EUR/USD

EUR/USD dropped sharply late Wednesday, as the pair shed over one cent following the news that the Federal Reserve would scale down its QE program by $10 billion a month, starting in January. The euro has edged lower on Thursday, trading in the mid-1.36 range in the European session. Taking a look at Thursday’s releases, Eurozone Current Account shot higher, hitting a seven-month high. It’s a busy day in the US, with three key releases – Unemployment Claims, Existing Home Sales and the Philly Fed Manufacturing Index.

Anyone looking for some drama from Bernard Bernanke and the Federal Reserve on Wednesday was not left disappointed. The Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, and EUR/USD dropped over one cent.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Overshadowed by the Fed’s bombshell announcement, a two-year, bipartisan budget agreement is  sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.

German releases continue to look sharp this week. PMI data was solid, as the Service and Manufacturing PMIs pointed to expansion. German ZEW Economic Sentiment, a key indicator which is based on a survey of institutional investors and analysts, jumped to 62.0 points in November, up from 54.6 the previous month. This easily beat the estimate of 55.3. On Wednesday, German Ifo Business Climate posted a second straight reading above the 109.0 line, coming in at 109.5 points. This was the key index’s best showing since March 2012. Germany is the Eurozone’s largest economy, and if the region is to shake off weak economic growth and high unemployment, the German locomotive will have to lead the way. There was some good news on Thursday as Eurozone Current Account jumped to 21.8 billion euros, way up from 13.7 billion in the previous release. This crushed the estimate of 14.2 billion, and was the largest current account surplus we’ve seen since April.

EUR/USD for Thursday, December 19, 2013

EUR/USD December 19 at 10:40 GMT

EUR/USD 1.3675 H: 1.3694 L: 1.3650

EUR/USD Technical

• EUR/USD has steadied on Thursday, following sharp losses the day before. The pair hit a low of 1.3653 late in the Asian session, but has edged higher since then.
• On the downside, 1.3649 has weakened significantly with the euro’s sharp drop. Will the pair continue to lose ground and break below this line? This line is followed by support at 1.3585.
• The pair faces resistance at 1.3786, which now has some breathing room. This is followed by a resistance line at 1.3893, which has remained intact since October 2011.
• Current range: 1.3649 to 1.3786

Further levels in both directions:

• Below: 1.3649, 1.3585, 1.3500, 1.3410 and 1.3325
• Above: 1.3786, 1.3893, 1.4000 and 1.4140

OANDA’s Open Positions Ratio

EUR/USD ratio remains unchanged in Thursday trading, continuing the trend we have seen since the start of the week. This is consistent with the pair’s lack of movement on Thursday. A large majority of the open positions are short, indicative of a trader bias towards the dollar resuming its rally against the euro.

The pair is trading quietly on Thursday. We could see the volatility return during the North American session, as the US releases three key events later in the day, including the all-important Unemployment Claims.

EUR/USD Fundamentals

• 9:00 Eurozone Current Account. Estimate 14.2B. Actual 21.8B.
• Day 1 – EU Economic Summit.
• 9.42 Spanish 10-year Bond Auction. Actual 4.10%.
• 13:30 US Unemployment Claims. Estimate 336K.
• 15:00 US Existing Home Sales. Estimate 5.04M.
• 15:00 US Philly Fed Manufacturing Index. Estimate 10.3 points.
• 15:00 US CB Leading Index. Estimate 0.7%.
• 15:30 US Natural Gas Storage. Estimate -260B.

*Key releases are highlighted in bold

*All release times are GMT