Euro Breaks Below 1.3000 As ECB Discusses Cutting Rates

Includes: FXE
by: FXstreet

The euro weakened sharply on Thursday and broke below the 1.3000 psychological level versus the dollar after the ECB decided to leave rates unchanged but it did lower its growth and inflation forecasts, while President Draghi said that policy makers considered cutting interest rates.

Despite euro's plunge, risk appetite was visible in the rest of currencies and stocks, with European and Wall Street indexes printing broad gains.

Looking ahead, the U.S. nonfarm payrolls report is due for release on Friday, and investors could chose to stay sidelined ahead of the data.

Euro breaks below 1.3000, downside favored near-term

After being rejected from levels above 1.3100 several times this week, the EUR/USD fell to a 7-day low of 1.2960, weighed by speculation that the ECB could shift to negative rates on funds deposited.

In the short-term, the bias has turned to the downside for the cross, with 1.2950 as immediate support. Once below the pair could accelerate toward 1.2900. On a wider view, the pair is staging a fresh pullback within its broader 1.2660/1.3170 range, where it has traded since early September. The pair now needs to regain the 1.3000 mark to ease the bearish pressure.

However, fundamentally speaking, ongoing European woes, ECB more dovish stance and the lack of progress in U.S. "fiscal cliff" talks could continue to cap the upside in EUR/USD.

In this regard, the TD Secutities team argues that since Draghi noted the ECB's "wide discussion" on rates today, we've seen the EUR trek lower, slipping below 1.30, bunds bull steepen, and the July eonia forward rate turn negative as further cuts look increasingly likely. "We may see the moves in rates extend further, as markets have more time to mull over the implications of today's ECB's meeting", they add.

Meanwhile, the Wells Fargo team sees potential for the consolidation in foreign currencies. "Market attention now turns to the U.S. November jobs report, with a modest payroll gain of 86,000 expected, and the ongoing U.S. budget talks", said the Wells Fargo analysts. "We remain essentially neutral on FX markets for the near-term, and see potential for the consolidation in foreign currencies to continue".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.