The euro came under significant pressure on Thursday, as the currency fell 1.5 percent versus the greenback and roughly 2 percent against the British pound and Japanese yen. Economic data certainly wasn’t working in the currency’s favor, as the German economy lost twice as many jobs as expected in January. Indeed, the net unemployment change rose for the second consecutive month by 56,000, which was the sharpest increase since March 2005, while the jobless rate rose slightly more than expected to 7.8 percent. Meanwhile, Bloomberg’s retail Purchasing Managers’ Index (PMI) actually rose to 44.0 in January, but with the index still below 50 and thus signaling a contraction in business activity for the eighth straight month, there was little optimism to be gleaned from the report. Finally, various measures of sentiment in the Euro-zone - including consumer, economic, industrial, and services – turned increasingly pessimistic in January as all of the indexes fell to the worst levels since record-keeping began in 1985.
All of Thursday’s news added to speculation that the European Central Bank will continue cutting interest rates, but Friday’s release of Eurostat’s estimate for Euro-zone CPI may go a long way to add to these expectations or negate them. The estimate is projected to show at 5:00 ET that inflation growth eased to a nearly 10-year low of 1.4 percent in January from 1.6 percent. Given ECB President Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s total of 225 basis points worth of rate cuts since October, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again on February 5, and weigh on the euro. On the other hand, if CPI does not fall further, the currency could gain as the markets assume the central bank will leave rates unchanged next month and wait until March to make monetary policy more accommodative. From a technical perspective, my bias for EUR/USD remains bullish in the near-term, though a break below 1.2861 would force me to reconsider.
Related Article: Euro Weekly Trading Forecast
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