EUR/USD May 3 – Euro Drops as ECB Cuts Rates to 0.50%

The ECB lowered its benchmark interest rate on Thursday by 0.25%, bringing the rate to a record low of 0.50%. EUR/USD
responded negatively, dropping over a cent on Thursday. The pair has
moved upwards on Friday, and pushed above the 1.31 line early in the
European session.  In economic news, US releases looked sharp, as Trade
Balance and Unemployment Claims beat expectations. There are three key
events out of the US on Friday – Non-Farm Payrolls, the Unemployment
Rate and ISM Non-Manufacturing PMI.

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

EUR/USD Technical

• Asian session: Euro/dollar was uneventful, and consolidated at
  1.3172. The pair has gained ground in the European session, and crossed
  above the 1.31 line.


• Current range: 1.3100 to 1.3400.

Further levels in both directions:  

• Below: 1.31, 1.3050, 1.3000, 1.2960, 1.2880, 1.2805, 1.2750 and 1.27.


• Above: 1.3140, 1.3170, 1.3255, 1.3290, 1.3350 and 1.34.


• On the downside, the pair is testing 1.31.


• 1.3140 is providing weak resistance. Next is 1,3170, a key level.

Euro makes up some ground after sharp losses on Thursday – click on the graph to enlarge.

EUR/USD Fundamentals

• 9:00 EU Economic Forecasts.


• 9:00 EU PPI.


• 12:30 US Non-Farm Employment Claims. Exp. 146K.


• 12:30 US Unemployment Rate. Exp. 7.6%.


• 12:30 US Average Hourly Earnings. Exp. 0.2%.


• 14:00 US ISM Non-Manufacturing PMI. Exp. 54.1 points.


• 14:00 US Factory Orders. Exp. -2.8%.


• 16:30 US Federal Reserve Governor Daniel Tarullo Speaks.

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

EUR/USD Sentiment

• ECB pulls the trigger: For the first time in almost
  a year, the ECB lowered interest rates, to a record low of 0.50%. The
  rates had been pegged at 0.75% since July 2012. Most analysts had
  expected the cut, as the Eurozone economy remains sluggish, and many of
  the major European economies have been bitten by recession. However, the
  markets reacted negatively to comments by ECB head Mario Draghi that
  the ECB would consider a negative deposit rate for banks. The
  deposit rate, which is what the ECB pays Eurozone banks for overnight
  deposits, currently stands at 0%. The euro was down more than one cent
  on Thursday as a result.


• Fed stays on the sidelines: The FOMC policy
  statement was a non-event on Wednesday, as the Fed basically noted that
  it wasn’t willing to take further steps, despite weakness in the
  economy. This
  was a relatively hawkish statement from the Fed, which tends to be more
  dovish. Currently, the Fed is purchasing $85 billion in assets under
  the QE program, and did not indicate any changes were coming. The Fed
  did take a shot at the government’s economic policy, saying that current
  fiscal policy was restraining economic growth.


• US Data Improves: The US has been struggling with
  weak releases since late March, so a couple of strong releases on
  Thursday was welcome news. The trade deficit narrowed from $43.0 billion
  to $38.8 billion, easily beating the estimate of $42.1 billion.
  Unemployment Claims came in below expectations for the second straight
  week. The key indicator dropped from 339 thousand to 324 thousand,
  blowing past the estimate of 346 thousand. We’ll get a better picture of
  the US employment situation on Friday, as the US releases Non-Farm
  Payrolls and the Unemployment Rate.


• Italian numbers improve: A loud sigh of relief
  could be heard in the markets, as Italy announced earlier in the week
  that a government had been formed. Although the new coalition will have
  its hands full with economic challenges, there was some good news this
  week from economic indicators. Italian 10-year bonds were down, dropping
  below 4%. This is an important sign of renewed investor confidence in
  the Italian economy. There was further positive news as the Italian
  Monthly Unemployment Rate nudged lower, from 11.6% to 11.5%. This beat
  the estimate of 11.7%. On Thursday, Italian Manufacturing PMI came in at
  45.5 points, above the forecast of 44.9 points. If the markets see more
  good news out of the Eurozone’s third largest economy, the euro could
  push higher.


• German Data Mixed: German data looked sluggish last
  week, and Tuesday’s numbers were mixed. Retail Sales declined 0.3%,
  below the estimate of 0.2%. Unemployment Change came in at 4 thousand
  new claims, worse than the estimate of two thousand. On the bright side,
  Consumer Climate rose to 6.2 points, beating the estimate of 5.9
  points. In order for the Eurozone to stage a recovery, Germany’s
  weakness was an important factor in the ECB’s decision to cut rates, and
  the Eurozone will be unlikely to recover if German numbers don’t
  improve.