EUR/USD: Euro Continues To Lose Ground

 | Dec 20, 2013 05:32AM ET

EUR/USD remains under pressure on Friday, as the pair trades in the low-1.36 range. The high-flying euro has hit some turbulence, coughing up about 150 points since Wednesday's dramatic Fed announcement to taper QE. US releases were a major disappointment, as Unemployment Claims rose for the second consecutive week. As well, Existing Home Sales and the Philly Manufacturing Index both fell short of their estimates. On Friday, German numbers were mixed. PPI posted another decline, but German Consumer Climate jumped to its highest levels in six years. Today’s US highlight is Final GDP.

German Consume Climate climbed from 7.4 to 7.6 points, its best reading since August 2007. On the inflation front, German PPI posted another decline, its fourth in five releases, as inflation indicators in Germany and the Eurozone continue to point to weak inflation, despite record low interest rate levels in the Eurozone. Germany is the Eurozone's largest economy, and if the region is to shake off weak economic growth and high unemployment, it will need the German locomotive to lead the way.

US releases on Thursday looked awful. Unemployment Claims jumped to 379 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. The previous release's weak numbers were attributed to the holiday season, but two consecutive poor releases will certainly not comfort the markets. There was more bad news to follow. Existing Home Sales posted its third consecutive decline, dropping to 4.90 million compared to 5.12 million in the previous release. The Philly Fed Manufacturing Index rose from 6.5 to 7.0 points, but this was way off the estimate of 10.3 points.

Anyone looking for some drama from Bernard Bernanke and the Federal Reserve on Wednesday was not left disappointed. The Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed's asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had not expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, and EUR/USD dropped over one cent and remains under pressure.

In its dramatic tapering announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the US unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

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Overshadowed by the Fed's bombshell announcement, a two-year, bipartisan budget agreement is sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.