Forex Market: EUR/USD daily trading outlook

Yesterday’s trade saw EUR/USD within the range of 1.0549-1.0644. The pair closed at 1.0611, shedding 0.20% on a daily basis, while marking its sixth loss in the past eight trading days. The daily low has been the lowest level since April 14th, when the pair went down as low as 1.0529.

At 7:19 GMT today EUR/USD was losing 0.23% for the day to trade at 1.0589. The pair touched a daily low at 1.0584 at 7:16 GMT, overshooting the range support level (S3).

Today EUR/USD trading may be influenced by a number of macroeconomic reports and other events as listed below.

Fundamentals

Euro area

Services sector data by Markit

Activity in Italys sector of services probably expanded for a second consecutive month in November, with the corresponding PMI coming in at a reading of 54.0, as expected by experts, from 53.4 in the prior month. If expectations were met, November would be the eleventh successive month, when the PMI inhabited the area above 50.0. Markit Economics is expected to release the official reading at 8:45 GMT.

Frances final services PMI probably confirmed the preliminary PMI reading of 51.3 in November, which was reported on November 23rd. If so, November would be the tenth consecutive month, when the PMI stood in the zone of expansion. In October the final services PMI was estimated at 52.7, improving from a preliminary reading of 52.3. The final reading for November is due out at 8:50 GMT.

The final reading of German services PMI probably confirmed the preliminary value for November, with the index coming in at 55.6, according to market expectations. If confirmed, November would be the 30th consecutive month, when the services PMI stood above the 50.0 level. It would also be the highest PMI level since September 2014, when a final value of 55.7 was registered. In October the final services PMI was reported at 54.5, down from a preliminary reading of 55.2. The index is based on data collected from a representative panel of more than 500 companies, operating in Germanys services sector, and gauges variables such as sales, employment, inventories and prices. Markit will release the final reading at 8:55 GMT.

The final services PMI in the Euro area probably also confirmed the preliminary value for November, with the index remaining at 54.6. If so, November would be the 28th straight month of activity expansion. It would also be the highest PMI level since May 2011, when the gauge came in at a final 56.0. In October the index came in at 54.1, according to final data, down from a preliminary reading of 54.2. The Purchasing Managers Index is based on a monthly survey, encompassing a sample of approximately 2 000 business entities, which represents private sector conditions in terms of new orders, output, employment, prices etc. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland. Readings above the key level of 50.0 indicate optimism (increasing activity). Higher-than-expected values of any of the above mentioned PMIs would support demand for the common currency. The final reading for the Euro region is scheduled to be released at 9:00 GMT.

Retail sales

Annualized retail sales in the Euro region as a whole probably rose 2.7% in October, according to the median forecast by experts, after in September sales climbed at a pace of 2.9%. If expectations were met, October would be the 22nd consecutive period of growth. In monthly terms, retail sales probably climbed 0.2% in October, according to market expectations, following a 0.1% dip in September. This is a short-term indicator, which provides key information about consumer spending trend on a national scale. In case the index of retail sales rose at a faster-than-projected pace, this would have a moderate bullish effect on the euro, because of the positive implications for the regions inflationary pressure and overall growth. Eurostat is expected to publish the official data at 10:00 GMT.

ECB policy decision and press conference

At 12:45 GMT the European Central Bank (ECB) is to announce its decision in regard to borrowing costs. The median estimate by experts suggests that the central bank will probably leave its benchmark interest rate intact at the record low level of 0.05% at the policy meeting today. The bank last reduced the refinancing rate by 10 basis points to the current 0.05% at the September 4th 2014 meeting.

At its meeting on October 22nd the central bank kept the marginal lending facility intact at 0.30% and the deposit facility at -0.20%. Since March the bank has been implementing its public and private sector asset purchasing program at the amount of EUR 60 billion per month, which is intended to run until late September 2016, or beyond, in case macroeconomic conditions require it. However, in October the bank indicated that it would re-assess the asset-purchasing program at the upcoming policy meeting, as growth outlook was at risk by emerging markets stress and possible effects from volatility in the global markets. In addition, the Accounts from the October meeting revealed that negative risks to consumer inflation have heightened. Yesterdays downbeat data on the harmonized CPI in the Euro region may add to the case of stimulus expansion.

According to extracts from the most recent Account of the policy meeting of the ECBs Governing Council: ”The information that had become available since the Governing Council’s meeting in early September broadly confirmed the ongoing recovery. It also pointed to continued weak price pressures and suggested that the expected timing of a sustained normalisation of inflation could be pushed back further, which called for a thorough analysis of the factors that were currently slowing the return of inflation to levels below, but close to, 2% over the medium term.”

”… while the ECB’s asset purchase programmes and lending operations were working as intended in expanding liquidity, supporting favourable financing conditions and ultimately reaching output and prices, there had been a number of countervailing developments in external conditions. These included persistently low oil prices, weaknesses in emerging economies and the postponement of the expected adjustment in policy rates in the United States.”

”Taken together, the impact of external factors and heightened uncertainty raised the possibility that the ECB’s measures, despite their magnitude, might not be gaining sufficient traction in the present environment.”

”The renewed deterioration in inflation data had been largely due to commodity prices and external factors, as well as possibly to structural changes, outside the domain of monetary policy, while survey-based measures of longer-term inflation expectations remained well anchored.”

”Taking into account the views expressed by the Governing Council, the President concluded that the degree of monetary policy accommodation would need to be re-examined at the December monetary policy meeting.”

In case the ECB decided to expand the scale of its asset-purchasing program, this would certainly be taken as a strong bearish signal by market participants. A further reduction of the refinancing rate would have the same effect on the euro.

The interest rate decision is to be followed by the press conference with ECB President Mario Draghi, during which volatility of euro crosses usually heightens. In case Draghi offers a more hawkish tone, the euro will usually receive support, while a more dovish tone will have a bearish effect on the currency. The press conference is scheduled at 13:30 GMT.

United States

Initial, Continuing Jobless Claims

The number of people in the United States, who filed for unemployment assistance for the first time during the business week ended on November 27th, probably increased to 267 000, according to market expectations, from 260 000 in the previous week. The latter has been the lowest number of claims since the business week ended on October 23rd, when 260 000 applications for unemployment benefits were reported.

The 4-week moving average, an indicator lacking seasonal effects, was 271 000, remaining unchanged compared to the preceding weeks revised up average.

The business week, which ended on November 20th has been the 38th consecutive week, when jobless claims stood below the 300 000 threshold, which implied a healthy labor market.

Initial jobless claims number is a short-term indicator, reflecting lay-offs in the country. In case the number of claims met expectations or increased further, this would have a moderate bearish effect on the US dollar.

The number of continuing jobless claims probably dropped to the seasonally adjusted 2 183 000 during the business week ended on November 20th from 2 207 000 in the preceding week. The latter represented an increase by 34 000 compared to the revised down number of claims reported in the week ended on November 6th. This indicator reflects the actual number of people unemployed and currently receiving unemployment benefits, who filed for unemployment assistance at least two weeks ago.

The Department of Labor is to release the weekly report at 13:30 GMT.

Non-Manufacturing PMI by the ISM

Activity in United States’ sector of services probably slowed down in November, with the corresponding non-manufacturing PMI coming in at a reading of 58.0, according to the median forecast by experts, down from 59.1 in October. The latter has been the highest PMI reading since July, when a level of 60.3 was reported. If expectations were met, November would be the 71st consecutive month, when the gauge stood in the area above 50.0. The PMI is a compound index, based on the values of four equally-weighted components, which comprise it. These sub-indexes reflect seasonally adjusted new orders, seasonally adjusted employment, seasonally adjusted business activity and supplier deliveries.

The New Orders Index stood at 62.0 in October, up from a reading of 56.7 in the prior month. The Employment Index advanced to 59.2 in October from 58.3 in September, while marking growth for the 20th month in a row, according to data by the Institute for Supply Management (ISM). The Prices Index rose to 49.1 in October from 48.4 in September, which indicated prices declined in October for a second month in a row. The Non-Manufacturing Business Activity Index advanced to 63.0 in October from 60.2 in September, indicating growth for a 75th straight month.

Among the 17 services industries, 14 reported growth in October.

In case the general non-Manufacturing PMI slowed down more than anticipated in November, this would have a strong bearish effect on the US dollar.

Factory orders

Factory orders in the United States probably rose 1.3% in October compared to September, following two consecutive months of decline. If expectations were met, this would be the fastest monthly rate of increase since June 2015, when a 1.8% expansion was reported. In September the general index registered a 1.0% drop. Excluding the sector of transportation, factory orders went down 0.6% in September. This indicator reflects the total value of new purchase orders, placed at manufacturers for durable and non-durable goods, and can provide insight into inflation and growth in the US sector of manufacturing. In case new orders rose at a faster-than-anticipated rate, this would have a moderate bullish effect on the US dollar, as it implies future growth acceleration. The US Census Bureau will release the official data at 15:00 GMT.

Yellen testimony

Today the Fed Chair Janet Yellen is expected to testify before a joint committee of Congress.

Bond Yield Spread

The yield on German 2-year government bonds went as high as -0.421% on December 2nd, after which it closed at -0.438% to lose 0.004 percentage point in comparison with December 1st. It has been the sixth drop in the past eight trading days and also a third consecutive one.

The yield on US 2-year government bonds climbed as high as 0.954% on December 2nd, after which it closed at 0.942% to add 3.1 basis points (0.031 percentage point) compared to December 1st. It has been the eleventh gain in the past thirteen trading days.

The spread between 2-year US and 2-year German bond yields, which reflects the flow of funds in a short term, widened to 1.380% on December 2nd from 1.345% on December 1st. The December 2nd yield spread has been the largest one in more than seven months.

Meanwhile, the yield on German 10-year government bonds soared as high as 0.484% on December 2nd, after which it slid to 0.480% at the close to add 1.1 basis point (0.011 percentage point) compared to December 1st. It has been the third gain in the past eight trading days.

The yield on US 10-year government bonds climbed as high as 2.201% on December 2nd, after which it slipped to 2.185% at the close to add 4 basis points (0.04 percentage point) compared to December 1st. It has been the first gain in the past eight trading days.

The spread between 10-year US and 10-year German bond yields widened to 1.705% on December 2nd from 1.676% on December 1st. The December 2nd yield difference has been the largest one since November 30th, when the spread was 1.733%.