EUR/USD Daily Technical Analysis for January 17, 2018

The EUR/USD whipsawed initially moving lower early during the European trading session but rebounded sharply during the North American Trading session closing up on the day.  A weaker than expected Empire manufacturing report took some of the luster off the dollar.  German Inflation was confirmed at 1.6% year over year in December, while Merkel’s agreement with the SPD is still capping the upside to the EUR/USD.

Technicals

The EUR/USD currency pair generated a doji day where the open and the close were at the same level which reflects indecision. The sharp rebounded in the currency pair provides the backdrop for a rally in the exchange rate.  Support is seen near the 10-day moving average at 1.2072, while resistance is seen near the 2014 highs near 1.40. Momentum is positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to a higher exchange rate.

German Inflation Was Unchanged from the Preliminary Reading

German HICP inflation was confirmed at 1.6% year over year in December, unchanged from the preliminary reading, which meant prices rose 1.7% year over year on average last year. This is still lower than what the ECB would like for the Eurozone as a whole, and only in February did the headline rate top the ECB’s 2% target. Justification then for Draghi who pushed through another QE extension with net asset purchases set to continue until September at least, but it seems the central bank is now at least eying a change in the guidance and a firm commitment to an end date for QE, although recent market reactions to the hint of a change in guidance will back those arguing for caution with regard to the tweaks.

Merkel’s coalition not secured yet

The breakthrough agreement between Merkel and SPD head Schulz was just a successful end to exploratory talks on a grand coalition, which is still subject to approval by SPD party members before coalition talks can start in earnest. And after originally rejecting another grand coalition Schulz is struggling to convince especially the younger generation that the U-turn is in the SPD’s favor. The SPD’s youth organization has rejected the move from the start and preliminary votes at state level ahead of the final vote at the party conference on Sunday are highlighting that the split goes deep. In Berlin party leaders rejected the deal, in Brandenburg leaders were in favor and in NRW, the most important state the mood is mixed. 600 party delegates will have to decide on the formal start of coalition talks on Sunday.

ECB’s Lane warns of Brexit risk for the Eurozone

The Irish central bank head said “the City of London is the wholesale headquarters of the EU”, adding that “if there is a genuine shock and we have a Brexit without a transition period, then that is a financial stability risk”. Lane said that “Brexit is a bigger headache if there is no trade deal”, which is what officials are looking most closely at, “that and on financial services”. Clearly a hard Brexit will be a challenge for both sides, but Lane’s comments are a reminder, that despite the efforts to reduce the reliance on London’s financial centre, the Eurozone is not there yet. In a way though the warnings will add to the arguments of those who want to move clearing away from London to within the Eurozone.

The ECB’s Hansson said the Central Bank could end QE in September

Hansson clearly is not speaking for the ECB council as a whole, but the camp arguing for a fimr commitment from the central bank to the end of net asset purchases had already been vocal ahead of the December meeting and the minutes showed that there is a broad consensus for changes to the forward guidance as early as this month. Still, the focus still remains on gradualism and whether the hawks will win out or whether Draghi will want to keep a trump card up its sleep and keep QE open ended for now remains to be seen and could also depend on the reaction on forex markets. Whatever the ECB says at this month’s council meeting we continue to expect net asset purchases to be phased out in Q4 this year and the ECB to stick to the current sequencing of exit steps, with rate hikes not on the agenda until well after the end of net asset purchases and the ECB continuing to reinvest redemptions, meaning the central bank’s policy will remain very accommodative.

UK December CPI Met Expectations

UK December CPI met at expectations in dipping to 3.0% year over year from the cycle high of 3.1% that was recorded in November. This met the median forecast, while Core CPI ebbed a little more than expected in coming in at 2.5% year over year, down from 2.7% in the month prior and undershooting the median for 2.6% year over year.

UK PPI input prices came in slightly below forecasts at 4.9% year over year, while PPI output prices came in slightly above expectations, at 3.3% year over year. Overall, the data fits with BoE projections. Increases in fuel and tobacco prices were offset by declines in airfares and recreational goods. The impact of past sterling declines has reduced, with EUR/GBP and the broader trade-weighted measure of the pound showing a comparatively narrow decline between December 2017 and December in the previous.