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EUR/USD Forecast June 2-6
EUR/USD remained depressed and tested lower ground. And now, it’s money time with the ECB decision. What actions will the ECB take? Will the euro further fall or is it already priced in? We have fresh inflation numbers preceding the decision, as well as quite a few other indicators on the docket. Here is an outlook on the highlights of this week and an updated technical analysis for EUR/USD.
In the ECB conference, Mario Draghi made it clear that action is imminent in the ECB meeting. Also a few other members of the central bank echoed these intentions. In addition, data has not been too positive, with disappointments coming from German employment and also from initial weak inflation numbers coming out of Italy and Spain. In the US, the first quarter was worse than expected as the US economy contracted by 1%, but more up to date data for Q2 already looks better.
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Moody's Lowers Rating Outlook On 82 EU Banks
Moody's Investors Service lowered the rating outlook on 82 European banks to 'negative' as a new rule to reduce the risk of taxpayers in case of bank failure could make stakeholders more vulnerable to losses.
At the same time, the rating agency affirmed long-term ratings of 109 European financial institutions and upgraded one. It downgraded the outlook to 'stable' from 'positive' on two long-term ratings.
Downgrading the outlook, Moody's said with the legislation underlying the new resolution framework and the explicit inclusion of burden-sharing with unsecured creditors, the balance of risk for banks' senior unsecured creditors has shifted to the downside.
The Bank Recovery and Resolution Directive and Single Resolution Mechanism steps were taken by the EU with an intention to reduce the risk that bank-related contingent liabilities will crystallize on EU government in a future banking sector stress scenario.
"While Moody's support assessments are unchanged for now, the probability has risen that they will be revised downwards to reflect the new framework," the agency said.
Cameron warns Britain could quit EU if Juncker gets top job
British Prime Minister David Cameron has warned that his country could leave the European Union if Luxembourg's former premier Jean-Claude Juncker became the next European Commission president, Der Spiegel reported.
Quoting "sources close to the participants" of Tuesday's EU leaders summit in Brussels, the German magazine reported that Cameron had issued the warning to German Chancellor Angela Merkel, who backs Juncker for the top commission job.
Cameron reportedly told Merkel that picking Juncker for the job would "destabilise his government to such a point that it would bring forward a referendum on whether to exit the EU" -- a move which is likely to result in a popular consensus to leave the bloc.
"A figure from the 80s cannot resolve the problems of the next five years," Cameron reportedly said, according to extracts of the Spiegel article.
Cameron is deeply wary of Juncker, an EU federalist, particularly after his party suffered a humiliating loss to eurosceptic UKIP in the European elections.
He has already pledged to hold a referendum on Britain's EU membership in 2017.
Contacted by AFP, a Downing Street spokesman declined comment on the Spiegel article, saying it is too early to be making any comments on potential candidates for the European Commission job.
Merkel had said Friday that talks were being held in the "spirit that Jean-Claude Juncker should become president of the European Commission" in her clearest statement of support for the veteran politician.
But besides Cameron, Sweden's Fredrik Reinfeldt, Hungary's Viktor Orban and, according to several European sources, the Netherlands' Mark Rutte and Finland's Jyrki Katainen, are also hostile to Juncker.
EU leaders have traditionally named the Commission head on their own, but under new rules they now have to "take into account" the results of last Sunday's European parliamentary elections, though exactly what that means remains unclear.
EUR/USD weekly outlook: June 2 - 6
The euro was higher against the dollar on Friday, as soft economic data weighed on the greenback, but the shared currency’s gains were held in check amid heightened expectations for monetary easing by the European Central Bank.
EUR/USD rose to 1.3633 late Friday from a three month trough of 1.3585 on Thursday, trimming the week’s losses to 0.13%. For the month, the euro dropped 1.69% against the dollar.
The pair is likely to find support at 1.3585, Thursday’s low and resistance at 1.3675.
Data on Friday showing that the annual rate of inflation in Italy and Spain slowed in May underlined expectations that the ECB will take steps to tackle low consumer price growth, which is threatening the fragile recovery in the euro zone.
The annual rate of inflation in Spain slowed to 0.2% in May from 0.3% in April, official data showed, while the annual rate of inflation in Italy slowed to 0.4% last month from 0.5%.
The dollar eased on Friday after data showed that U.S. consumer spending fell 0.1% in April from a month earlier, missing forecasts for a 0.2% increase. Personal income rose 0.3%, in line with forecasts.
Separately, the final reading of the University of Michigan's consumer-sentiment index for May came in at 81.9, up slightly from a preliminary reading of 81.8, but falling short of forecasts for 82.5.
The U.S. dollar index, which tracks the dollar against six other major currencies, traded softer on Friday and was last down 0.11% at 80.44. Earlier in the week, the index rose to highs of 80.63, the most since early April.
The euro also pushed higher against the yen on Friday, with EUR/JPY rising 0.22% to 138.76, up from Thursday’s four month lows of 137.95, but lost 0.27% for the week. The euro tumbled 2.10% against the yen in May.
In the week ahead, investors will be looking to Friday’s U.S. nonfarm payrolls report for May for further indications on the strength of the labor market, while Tuesday’s euro zone inflation report will also be in focus, ahead of the ECB policy meeting and press conference on Thursday.
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Protecting European bank test data from lucrative leaks
It would be an insider trader's dream to know ahead of time which of Europe's banks will fail or need more capital, and all that data will be stored somewhere in cyberspace as the European Central Bank assesses the euro zone's top banks.
The chances of a leak are multiplied by the thousands of consultants who will work on data for the ECB's Comprehensive Assessment of the currency bloc's most important 128 banks, which include household names like Deutsche Bank and Santander along with national champions Bank of Cyprus and Bank of Valletta.
"It (data security) is of enormous concern," said Dan Keeble, a London-based partner at Deloitte, which is working on part of the ECB's assessment, an Asset Quality Review (AQR) for the euro zone's 13 largest banks and some smaller ones.
"Aside from the fact that much of the information required to conduct the AQR is commercially sensitive to individual banks, details of the conclusions regarding the AQR have the potential to be market influencing, and could damage financial stability."
That is why the consultants working on the centralized data - U.S. firm Oliver Wyman - cannot cut and paste, take screenshots or print out the data they are working on. And they will only have access to their part of the project, and only for as long as it takes to complete their task.
Thousands of other consultants working on individual banks face similar restrictions. Anyone caught leaking the information risks a hefty jail sentence, and the ECB said all access to the data is monitored, so users can be traced.
HIGHEST PRIORITY
The ECB, long used to holding sensitive data about its market operations and keeping secret its plans for interest rate changes, told Reuters data security was the "highest priority" in the review it is undertaking before it becomes the euro zone's financial supervisor in November.
All data communicated to, from and within the ECB is stored on 'Darwin', the ECB’s document and records management system. Anyone who wants access must file a request through a designated security manager at a national financial supervisor, and the central project management office must approve.
"All Comprehensive Assessment data is classified as ECB-Confidential, and access is limited to those who require it for project purposes," the ECB told Reuters in a statement, adding that the project "may be uprated soon to ECB-Secret".
Data about individual banks is stored on isolated servers within Darwin, and elevating it to Secret means access to the database, which is encrypted, is controlled by more senior people.
As well as staff at the ECB's newly created supervisory arm, much of the heavy lifting in the review is being done by private consultancy Oliver Wyman, which is acting as project manager.
"Oliver Wyman maintains strict processes to manage the confidentiality of proprietary client information as standard policy," the ECB said. "Each person working on the Comprehensive Assessment has signed additional confidentiality documents."
Oliver Wyman, whose staff work out of the ECB's Frankfurt premises and use ECB computers and must get security clearance from the ECB, declined to comment.
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EUR/USD almost unchanged, ECB meeting in focus
The euro was almost unchanged against the U.S. dollar on Monday, as Friday's disappointing U.S. data continued to weigh on demand for the greenback, while caution ahead of the European Central Bank's policy meeting this week held the euro in check.
EUR/USD hit 1.3620 during late Asian trade, the session low; the pair subsequently consolidated at 1.3631, inching down 0.02%.
The pair was likely to find support at 1.3586, the low of May 25 and resistance at 1.3668, the high of May 27.
Data on Friday showed that U.S. consumer spending fell 0.1% in April from a month earlier, missing forecasts for a 0.2% increase. Personal income rose 0.3%, in line with forecasts.
Separately, the final reading of the University of Michigan's consumer-sentiment index for May came in at 81.9, up slightly from a preliminary reading of 81.8, but falling short of forecasts for 82.5.
In the euro zone, data on Friday showing that the annual rate of inflation in Italy and Spain slowed in May added to expectations that the ECB will take steps to tackle low consumer price growth, which is threatening the fragile recovery in the single currency bloc.
The euro was steady against the pound, with EUR/GBP easing up 0.02% to 0.8139.
Later in the day, the Institute of Supply Management was to publish a report on U.S. manufacturing activity.
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German consumer prices in May 2014: expected rise of +0.9% on May 2013
Consumer prices in Germany are expected to rise by 0.9% in May 2014 compared with May 2013. Based on the results available so far, the Federal Statistical Office (Destatis) also reports that the consumer prices are expected to decline by 0.1% on April 2014.
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EUR/USD falls as market preps for possible ECB action
The euro fell against the dollar on Monday as investors bet the European Central Bank will loosen policy at its Thursday meeting, which overshadowed a lackluster U.S. manufacturing gauge and fueled demand for the greenback.
In U.S. trading, EUR/USD was down 0.21% at 1.3605, up from a session low of 1.3594 and off a high of 1.3638.
The pair was likely to find support at 1.3586, Thursday's low, and resistance at 1.3650, Friday's high.
The single currency came under pressure on expectations that the European Central Bank will take steps to tackle low inflation rates that are threatening an already fragile recovery in the single currency bloc, including cuts to all interest rates.
Earlier Monday, official data showed that Germany's consumer price index accelerated at an annualized rate of 0.9% last month, down from 1.3% in April. Analysts had expected German consumer prices to rise by 1.1% in May.
Separately, Markit research group said that Spain's manufacturing PMI rose to 52.9 this month, from 52.7 in May, in line with expectations, while Italy's manufacturing PMI slipped to 53.2 in June from 54.0 a month earlier, missing expectations for a 53.7 reading.
Meanwhile in the U.S., the Institute of Supply Management said its manufacturing purchasing managers' index ticked down to 53.2 in May from 54.9 in April, confounding expectations for a rise to 55.5.
Still, markets shrugged off the news, as any figure over 50 signifies expansion.
Elsewhere, the euro was down against the pound, with EUR/GBP down 0.22% at 0.8119, and up against the yen, with EUR/JPY up 0.31% at 139.20.
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Decline in German Inflation Pressures Euro
The EUR/USD is under pressure on Monday as investors positioned themselves ahead of Thursday’s major European Central Bank announcement. Volume and volatility were below average, suggesting many market players were on the sidelines.
Disappointing German inflation data was the latest bearish news to hit the Euro. The reaction to this news was a clear sign that investors expect the ECB to ease monetary policy this week to fight low inflation. The German inflation number missed estimates, falling from 1.1% in April to 0.6%. Traders are widely expecting the central bank to cut its benchmark interest rate and implement a policy of negative interest rates.
With the ECB set to become the first major central bank to implement a negative interest rate policy and the U.S. Federal Reserve on path to slash additional monthly stimulus, the interest rate differential makes the U.S. Dollar a more attractive investment than the Euro.
The GBP/USD advanced earlier in the session following the release of a report showing U.K. manufacturing output expanded for a 15th month in May, but investors were unable to hold on to the gains. Thin volume and low volatility ahead of this Thursday’s Bank of England monetary policy meeting were blamed for the lack of follow-through and commitment to the upside.
According to Markit Economics, U.K. manufacturing, based on a survey of purchasing managers, expanded to 57 in May, versus a reading of 57.3 in April. Helping to put a lid on the rally and push prices lower today was a drop in U.K. mortgage approvals. This report showed a decline to 62,918 from a revised 66,563 in March.
Support for August Gold futures continued to erode on Monday with the market coming close to testing the January 23 bottom at $1234.60. The stronger dollar gave gold investors another reason to liquidate their holdings in the precious metal. Aggressive buying in the equity markets has also helped push gold prices lower. Gold may reach a temporary bottom if stock prices correct from current lofty levels, but this reaction should not be enough to reverse the trend.
July crude oil prices were under pressure on Monday. Technically, the market is overbought and unable to attract fresh buyers at current price levels. This may mean the market may need to pullback into a value area near the psychological $100.00 level.
Fundamentally, despite an expected increase in demand because of low gasoline supplies, many traders still feel crude oil inventory is too high to support a sustained rally.
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Merkel wants Britain to stay in EU fold
German Chancellor Angela Merkel said Monday she hopes Britain will stay in the EU, amid wrangling over a top EU job that reportedly prompted an exit warning by the British prime minister.
Merkel reiterated that she was pressing "in all the talks that I have" for former Luxembourg premier Jean-Claude Juncker to gain majority backing to become the EU Commission's next president.
But she said she hoped such a "controversial" decision would be taken in the "spirit of Europe" which meant seeking the "highest degree of consensus".
"Therefore it's not as though I don't mind, for example, whether Britain is a member of the European Union or not," Merkel told a joint press conference with the visiting Georgian prime minister.
Her spokesman had also earlier said that Britain belonged in the EU and that neither Merkel nor her government was "indifferent" as to whether non-euro member Britain was part of the wider 28-nation bloc.
"On the contrary, we're convinced Britain belongs in the EU," Steffen Seibert told reporters, adding Britain had gained much from its European membership, but also had a lot to contribute.
He said every member state had its "interests" and "own wishes" that it represented, which Germany had also done.
But he added that Europe "brings together individual, diverse states" and only succeeds in the long term with "respect, consideration, with ongoing discussion".
The comments follow a weekend German media report that British Prime Minister David Cameron had warned that his country could leave the EU if Juncker got the top commission job.
News weekly Der Spiegel said that Cameron told Merkel that picking Juncker for the job would "destabilise his government to such a point that it would bring forward a referendum on whether to exit the EU".
He has already pledged to hold a referendum on Britain's EU membership in 2017.
Cameron is deeply wary of Juncker, an EU federalist, particularly after his party suffered a humiliating defeat to the eurosceptic UKIP party in last month's European elections.
Besides Cameron, leaders in Sweden, Hungary and, according to several European sources, the Netherlands and Finland are also hostile to Juncker.