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3 Big Problems the ECB Can't Avoid

3 Big Problems the ECB Can't Avoid

Kathy Lien, Technical Strategist

The political problems in Portugal, mixed economic data, and spike in volatility will make it very tough for ECB President Mario Draghi to lend support to the euro at this week’s central bank meeting.

Volatility in the FX market went through the roof overnight with USDJPY erasing earlier gains and AUDUSD falling to fresh lows. Today's US economic reports were mostly better than expected, but the general anti-risk sentiment in the financial markets caused a downside reversal in USDJPY early in the North American session, and more specifically, it drove the Japanese yen (JPY) higher against all major currencies.

The performance of the US dollar (USD), on the other hand, was mixed. The greenback extended its gains against the commodity currencies, weakened against the yen and British pound (GBP), and held steady against the euro (EUR).

While Europe is ground zero for the volatility in the financial markets today, the shared currency has been surprisingly resilient.

A large part of the decline in the major currencies occurred during the European session, when news about the political crisis in Portugal sent the country's borrowing costs soaring and drove European stocks sharply lower in the process.

The crisis was kicked off by the resignation of the leader of the junior party. If a grand coalition cannot be formed, the government may be forced to hold early elections, which would be harmful for the euro because it would mean the collapse of the current government.

This political uncertainty coupled with mixed Eurozone data and the recent volatility in the financial markets will make it very difficult for European Central Bank (ECB) President Mario Draghi to justify any optimism in his much-anticipated press conference tomorrow.

See related: July 3 Fireworks in the FX Market

Meanwhile, this morning's US economic reports almost took a backseat to all of the action in Europe and Asia, and the dollar received only a minor lift from better-than-expected labor numbers.

Jobless claims dropped to 343K the week of June 29, down from 348K. According to private payrolls provider ADP, US companies added 188K workers last month, up from 134K.

Service-sector activity slowed in the month of June, with the ISM non-manufacturing index dropping to 52.2 from 53.7. Despite this decline, the outlook for the labor market and Friday's non-farm payrolls (NFP) report is still bright because job growth increased in the service sector last month.

The employment component of the ISM non-manufacturing index rose to its highest level since February, and as a result, we don't expect significant dollar losses on the back of this report.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.