The EUR/USD Continues to Trend Lower Despite Upbeat German Data

The EUR/USD moved lower on Tuesday continuing its downtrend, despite strong data that showed that the German economy remains strong. The Italian markets where hit hard by prospects of fresh elections, putting downward pressure on the currency pair.  The ECB’s Praet played down the recent weakness in the economy.

Technicals

The EUR/USD continued to move lower on Tuesday and is poised to test target support near the December 2017 lows at 1.1725.  Resistance on the currency pair is seen near the 10-day moving average at 1.2018.  The 10-day moving average crossed below the 200-day moving average reflecting that a short-term downtrend is now in place.  Momentum is negative as the MACD (moving average convergence divergence) histogram is printing in the red with a downward sloping trajectory which points to a lower exchange rate.  The fast stochastic has stabilized and is printing a reading of 8, well below the oversold trigger level of 20 which could foreshadow a correction.

Italian markets hit by prospect of fresh elections

The Five Star Movement has dropped its efforts to form a new government. President Mattarella is still pushing a technocratic government, but Lega head Salvini also argued against the idea of a non-partisan prime minister. The two largest parties seem to be pushing for another round of elections in July, after two months of unsuccessful attempts to form a stable government. The risk is that Lega and Five Star Movement could team up for a euro-sceptic government, which so far has been prevented by Lega Ally Berlusconi, who Five Star insists shouldn’t have any part in a joint government.

ECB’s Praet plays down data weakness

The Executive Board member reaffirmed confidence in the Eurozone recovery in a speech late Monday, saying that “there is so far no evidence that the moderation in the pace of the economic expansion reflects a durable softening in demand”. He added that “recent information remains consistent with a solid and broad-based expansion in domestic demand”. He suggested that supply side constraints could be partly to blame, although “only in some sectors and some countries”. At the same time he seemed to downplay concerns about the strength of the EUR, saying that the evidence for such an impact is “limited”, although he admitted that the “sharp decline in some sentiment indicators relating to the export sector is a source of concern”. Indeed, an article published ahead of the full release of the central bank’s economic bulletin on Thursday highlighted that a protectionist spiral is one of the downside risks not just to Eurozone growth.

German trade surplus widened as exports pick up

German trade surplus widened as exports pick up. Germany posted a trade surplus of EUR 22.0 billion in March, up from EUR 19.4 billion in the previous month, largely thanks to a rebound in exports, which rose 1.7% month over month, after two consecutive months of contraction. Imports declined for a third month. The March number left the accumulated surplus for the first quarter at EUR 63.1 billion, down from EUR 64.2 billion in the last quarter of 2017 and suggesting that net exports didn’t contribute much to overall growth in Q1, although this is nominal data of course, which is impacted b exchange rate developments. The unadjusted surplus amounted to EUR 61.0 billion in the first quarter of 2018, up from EUR 59.6 billion in the first quarter of 2017. The current account surplus widened to EUR 71.1 billion from EUR 68.0 billion.

German industrial production stronger than expected

Production rebounded 1.0% month over month in March from the -1.6% month over month contraction in the previous month. There was a broad rebound across all manufacturing groups, energy production expanded again and construction rose 0.6% month over month, after falling -3.1% month over month in the previous month, which confirms that the bad weather was largely to blame for the weak February numbers, although with the early timing of Easter, some may not have restarted to a full extent. Overall a partial rebound that highlights that existing orders are still keeping production afloat, despite the slump in manufacturing orders during the first quarter.

UK house prices data came in much weaker than expected

UK house prices data came in much weaker than expected, diving 3.1% month over month according to the April Halifax index. This followed a 1.6% month over month gain in the prior month, while the median forecast had been for a much more moderate 0.2% month over month decline. The year over year comparison fell to a 2.2% rise after gaining 2.7% in March. The underlying three-month on three-month figure was -0.1%, and is the third consecutive decline this comparison has shown.