The euro fell nearly 1 percent on Thursday, as EUR/USD tumbled and broke below the 38.2 percent fib of 1.1638 – 1.6041 at 1.4358.
This was important as it also marks the region where we have the December 2007 lows, which could make it difficult for the pair to drop much lower. The European Central Bank’s rate decision was essentially a non-event, as they opted to leave rates steady at 4.25 percent as expected and ECB President Jean-Claude Trichet’s post-meeting press conference yielded little no information. Mr. Trichet maintained that inflation will likely remain “well above” their 2 percent target for a “protracted period of time,” and that current interest rates will help the ECB maintain their primary objective of price stability. However, ECB staff projections for real GDP growth were revised down to a range between 1.1 percent and 1.7 percent in 2008 and between 0.6 percent and 1.8 percent in 2009. Furthermore, risks to the outlook were noted as being “particularly high”, with downside risks prevailing. Overall, this was supportive of interest rate expectations, as Credit Suisse overnight index swaps price in over 25bps worth of cuts by the ECB during the next 12 months. On Friday, the status of the euro will depend greatly on the US dollar, as there are no key European economic releases scheduled.
The US dollar resumed its rally on Thursday, as the European Central Bank and Bank of England rate decisions did little to shift broad interest-rate expectations, as Credit Suisse overnight index swaps are still pricing in nearly 50bps worth of hike by the Federal Reserve, just over 25bps in rate cuts by the ECB, and almost 100bps in cuts by the BOE during the next 12 months. Working in favor of US dollar strength was the release of ISM services unexpectedly improved in August to a reading of 50.6 from 49.5, with the rise above 50 signaling an expansion in the sector for the first time since May. A breakdown of the report, though, suggests that the headline reading may be a bit deceiving. While price growth appears to be slowing, domestic and export orders both continue to contract, as those indexes held below 50. Furthermore, the employment component slipped to 45.4, signaling weakening labor conditions for the fourth consecutive month. This certainly does not bode well for Friday’s US non-farm payrolls (NFPs) report, which is anticipated to show 75,000 job losses. However, the NFP report has not been the huge market-mover it once was for the greenback, and may have little bearing on whether or not the currency continues to gain or fails.
[B]Related article: US NFP and Canadian Employment Data Leverages a USDCAD Setup
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