EUR/USD waits for the ECB

Let’s face it, with two marquee events a week apart, market focus moved from Ben Bernanke to Mario Draghi, with little else on their minds. Traders are single mind individuals with short attention spans and blinding focus.

The eco calendar today is again moderately interesting. In the EMU, the final reading of the services PMI’s will be released. After weak figures from the manufacturing sector earlier this week, investors probably expect a further downward revision for this indicator too. However, the impact on EUR/USD trading should be limited. In the US, only some second-tier economic data are scheduled for release. Yesterday, EUR/USD gradually came off the recent top. Recent strength of the euro was at least partially due to short-covering ahead of this week’s ECB meeting. We have the impression that this move has run its course. Trading will probably remain erratic going into the ECB meeting. That said, if the repositioning out of euro shorts is more or less over, EUR/USD might drift still a bit further south as long as there is no high profile news/surprise (e.g. from the US data). Of course, tomorrow’s ECB meeting will be a key factor to decide on the next big move of EUR/USD.

Yesterday there was little news to inspire EUR/USD trading except news and rumors about the ECB programs. There was the usual market talk on disagreements between EMU policymakers but these headlines didn’t affect the euro much. EUR/USD remained well bid with all eyes still on the Thursday’s ECB meeting where chairman Draghi is expected to announce a big step on ECB bond buying. The Eurodollar hovered in a tight range just above 1.26 during the morning session in Europe. In technical/order driven trade, the pair dropped below this big figure in the run up to the restart of US trading and even tested the post-Jackson Hole lows in the 1.2560 area. Once again, the link with the developments in other markets (bunds, equities) was rather loose.

Separate markets followed their own technically inspired dynamics. Later, the market focus turned to the US ISM of the manufacturing sector. The report came out weaker than expected as the headline index dropped from 49.8 to 49.6, while a slight rebound to 50 was expected. The deviation from consensus was small, but the report didn’t bring any objection for the Fed not to proceed with further policy stimulation in the near future. At the same time, US July construction was also reported below consensus at -0.9% M/M vs + 0.4% expected. So, the dollar lost a few ticks across the board and EUR/USD rebounded to the 1.2590 area. There was a small reaction on the bond markets and on equity markets, too. However, the report didn’t really change the course of events.

The pair closed the session at 1.2566, compared to 1.2593 on Monday.

This morning sentiment on risk remained negative in Asia. Of late, the link between risk and EUR/USD was not that tight anymore, but risk-off is also no help for the single currency. This morning it reinforced yesterday’s technical correction of EUR/USD with the pair testing offers in the 1.2525 area. The Aussie dollar is losing further ground as the Q2 GDP was reported slightly weaker than expected (0.6% Q/Q vs 0.7% expected).

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