Euro Moves Higher As ECB Holds Course

 | Feb 07, 2014 05:57AM ET

EUR/USD has edged lower in Friday trading, as the pair trades in the low-1.35 range early in the European session. As expected, the ECB opted to maintain interest rates at their present level of 0.25%. The euro did react positively after ECB head Mario Draghi said that the central bank would not be taking any action at present to deal with low inflation levels in the Eurozone. Over in the US, Unemployment Claims rebounded nicely and came in below the estimate. In Friday news, German Trade Balance looked sharp, climbing to a three-month high. Today's highlight is the Non-Farm Employment Change, which will be released together with the Unemployment Rate.

With the Eurozone affected by very weak inflation, the markets were waiting to see if the ECB would take any action on Thursday. With the benchmark interest rate at a record low level of 0.25%, clearly there wasn't much room to cut much to go lower, but there was talk of lowering deposit rates below zero. Such a move would likely hurt the euro due to investors dumping their euros in favor of other currencies. When this didn't happen, the euro jumped, gaining about a cent after Draghi's press conference. Draghi then reiterated what we've heard many times, which is that for the foreseeable future, interest rates would stay at their current levels or could go lower. What action, if any, the ECB takes when it sets rates in March will be heavily influenced by the inflation situation in the Eurozone. If inflation weakens further, the ECB will be under strong pressure to make a move, such as lowering deposit rates.

The highlight of the week is the (official) Nonfarm Employment Change, which will be released later on Friday. Earlier this week, ADP Non-Farm Employment Change disappointed badly, sliding to 175 thousand in January, compared to 238 thousand a month earlier. This was well shy of the estimate of 191 thousand. Is the ADP release a prelude to grim tidings from Non-Farm Payrolls on Friday? If the NFP falters as well, the Fed could delay its next QE taper and the fallout from such a negative message could hurt the US dollar. At the same time, there was good news on the employment front this week, as Unemployment Claims dropped to 331 thousand, beating the estimate of 337 thousand.

Eurozone PMIs looked solid in January. The Spanish and Eurozone releases came in above the 50-point line, pointing to expansion. Italian Services PMI also improved, but remains in contraction mode. These numbers come on the heels of Manufacturing PMIs which also looked solid. At the same time, Eurozone Retail Sales slipped 1.6%, well off the estimate of a 0.7% decline. This key consumer spending indicator has posted declines in three of the past four readings, pointing to weak consumer spending, which is a key component of economic growth.

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