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Draghi under pressure to boost flagging Eurozone economy

01 April, 2014

The Eurozone economy has started the week by taking centre stage with the release of disappointing inflation data showing a slowdown in the region’s economy. The flash CPI reading, a key indicator of the health of the economy, decreased from February’s reading of 0.7% to 0.5%, which now puts substantial pressure on European Central Bank (ECB) President Mario Draghi to instigate new measures to boost the flagging economy. The ECB is due to make its latest monetary policy decision on Thursday – the outcome likely to be important for traders with volatility expected during the announcement and Draghi’s subsequent press conference. While the response to persistent negative inflation data would normally be to instigate a reduction of interest rates, the benchmark Eurozone interest rate is already at a historically low rate of 0.25% so there is not much room for Draghi to make further cuts. Instead, we may see him announce further monetary stimulus to try and boost the economy. However, if Draghi does announce a surprise interest rate cut it will likely cause a big jump in the euro.
The market is also eagerly awaiting the latest Non-Farm Payrolls (NFP) employment data from the US which is scheduled for Friday, along with the latest unemployment rate. The NFP data is considered the most accurate indicator of the health of the US economy and, as a result, it is a very influential news release with volatility in USD pairs expected during and shortly after the announcement. This month’s reading is expected to show around 196,000 new jobs created, an increase on last month’s figure of 175,000. If the number is over 190,000, it is likely that Federal Reserve Chairwoman Janet Yellen will continue the tapering of the stimulus programme at the current rate. However, should the data come in lower than expected it would be a worrying sign for the US recovery and Yellen will likely have to take further action to maintain the current level of stimulus. The unemployment rate will also play a key role in determining monetary policy with any substantial movement from February’s rate of 6.7% likely to help define Yellen’s future policy. The EUR/USD pivot point is 1.3754 with resistance levels at 1.3763, 1.3772 and 1.3781; and support levels at 1.3745, 1.3736 and 1.3727.
Friday will also see the release of Canada’s unemployment rate and the net change in employment – both of which may generate volatility in USD/CAD. The pivot point is 1.1056, with resistance at 1.1061, 1.1071 and 1.1076; and supports at 1.1046, 1.1041 and 1.1031.
In the UK, a raft of PMI data is being released this week, the headline act being Thursday’s services sector PMI. This report is the leading indicator of future potential growth and, with the services sector responsible for around 85% of the UK’s recent growth, the results will be important for assessing the robustness of the UK’s recovery. A reading over 50 shows growth in the sector and Thursday’s data is expected to show the rate has remained steady against last month’s reading of 58.2. Any substantial deviation on this rate either way is expected to generate GBP volatility. The GBP/USD pivot point is 1.6649, with resistance levels at 1.6658, 1.6669 and 1.6678; and supports at 1.6638, 1.6629 and 1.6618.
In the Asia-Pacific region, China’s manufacturing PMI data will be released on Tuesday and this will be closely watched as any indication of a drop in manufacturing will likely impact overall global growth and will also be expected to hit the region hard. The Reserve Bank of Australia (RBA) is also announcing its latest interest rate decision on Tuesday and while no change is expected, volatility may impact the Australian dollar in the wake of these two announcements, particularly if the data from China is not strong. RBA Governor Stevens indicated last week that the central bank is satisfied with the current interest rate levels saying the country’s monetary policy is “…playing its part in supporting sustainable growth in demand, consistent with the inflation target. We have signalled that if the economy evolves in line with the present set of forecasts, a period of stability in interest rates could be expected.” The AUD/USD pivot point is 0.9252, with resistance levels at 0.9265, 0.9272 and 0.9285; and support levels at 0.9245, 0.9232 and 0.9225.
Meanwhile, Japan is bracing for the impact of the new sales tax which will see rates rising from 5% to 8% as of April 1st. While no immediate impact is expected in the currency markets, the strength of retail sales may weigh heavily on the Japanese recovery which could have knock-on effects to the currency. The USD has been trading strongly against the JPY in the lead up to the sales tax increase with the USD/JPY pivot point at 102.90, with resistance levels at 102.95, 103.01 and 103.06; and support levels at 102.84, 102.79 and 102.73.

What to Watch this Week: With the interest rate decisions from the ECB and RBA due to be released this week, periods of high volatility are anticipated. EUR/USD is expected to be the big mover this week on Thursday (during the ECB announcement) and Friday (during the NFP release).

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