Euro Backtracks Sharply As ECB Hints At June Move

 | May 09, 2014 06:14AM ET

The euro had plenty of punch on Thursday, as the currency came within a whisker of the 1.40 line, only to sag and end the day with losses. EUR/USD is lower on Friday, as the pair trades in the low-1.38 range in the European session. At a policy meeting on Thursday, the ECB held interest rates, but ECB head Mario Draghi sent the markets into high gear when he announced that the central bank could take monetary action at its June meeting. In the US, Unemployment Claims looked sharp, sliding to a three-week low. On Friday, the German trade surplus narrowed in April and missed the estimate. Italian Industrial Production also disappointed, posting its third decline in four tries. Today's key US release is JOLTS Job Openings. The markets are expecting the indicator's upward trend to continue in April.

The ECB held its policy meeting on Thursday, and the central bank provided plenty of excitement for the markets. Mario Draghi took note of worrying inflation indicators, saying that food and energy prices, the strong euro and weak domestic demand were all factors in weak inflation which has engulfed the Eurozone. He then surprised the markets by adding that the Bank would be comfortable taking action in June, after re-examining inflation and growth forecasts in June. This is the clearest sign in months that the ECB could take action, and a reaction from the market was quick to follow, with the euro suffering sharp losses after coming within a few pips of the key 1.40 line. Draghi added that the ECB would continue to monitor exchange rates. Many analysts are of the view that the "line in the sand" for the ECB is the 1.40 line, and if the euro does move above this line, it's more than likely that the ECB will take action to reign in the high-flying currency.

US Unemployment Claims rebounded last week, as the key indicator dipped to 319 thousand. This beat the estimate of 328 thousand. The reading follows last week's excellent Nonfarm Payrolls and Unemployment Claims, as the US employment picture appears to have brightened. If employment numbers continue to improve, we can expect the Fed to continue tapering its QE scheme.

Federal Reserve Chair Janet Yellen testified before Congress on Wednesday and Thursday and gave a cautious thumbs-up to the economic recovery. She said that the economy has improved, but pointed to two sore spots - the job market remains weak and inflation is below the Fed's target of 2%. Yellen stated that she therefore expects that low interest rate levels will continue for a "considerable time". Yellen has stated previously that slack remains in the economy, and the Fed is expected to proceed carefully with future tapers to its QE scheme. Since December, the Fed has trimmed the asset-purchase program by almost half, cutting it to $45 billion each month.

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Eurozone manufacturing data continues to disappoint, and of particular concern are weak figures from Germany, the Eurozone's number one economy. German Industrial Production came in at -0.5%, well off the estimate of +0.3%. Earlier in the week, German Factory Orders slipped 2.8%, its sharpest decline since October 2012. This was nowhere near the estimate of 0.3%. French and Italian Industrial Production also declined in April, pointing to serious trouble in the manufacturing sectors of the major Eurozone economies.

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