EUR/USD Daily Technical Analysis for January 18, 2018

The EUR/USD continued to press higher but was unable to hold on to gains. European inflation came in as expected, just as ECB officials try to put a lit on the Euro’s rise. Brexit noise is beginning to pick up, while U.S. Chain Stores fell in the latest week.

Technicals

The EUR/USD tested higher and lower levels, hitting a fresh 3-year high at 1.2323 and then testing the prior session lows near 1.2193.  Support I seen near the 10-day moving average at 1.2099, target resistance is seen near the 1.40 mark.  Momentum remains positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. The RSI has moved sideways but the current reading is 73, above the overbought trigger level of 70 which could foreshadow a correction.

Eurozone HICP inflation was confirmed at 1.4% year over year as expected

The core rate remained steady at 0.9% year over year. The annual rate fell back from 1.5% year over year in the previous month, but after downward revisions to French and Spanish numbers there was some lingering speculation of a revised HICP Inflation is still far below the ECB’s upper limit for price stability, and the doves at the council are eager to move with caution as the ECB very slowly prepares to phase out net asset purchases. Deflation risks may be banned, but the weak core reading and recent EUR strength will argue against Draghi’s calls for a quick end to asset purchases.

ECB officials try to put lid on the Euro

Vice President Constancio and council member Nowotny both stressed that the ECB doesn’t target the exchange rate, but officials continue to come out trying to calm tightening fears which picked up in the wake of last week’s minutes and underpinned recent EUR strength. Vice President Constancio confirmed that the guidance doesn’t have to be changed immediately and that any tweaking will be gradual and cautious. Hawk Weidmann, who already tried to calm concerns of a rate hike this year last week, suggested that expectations for a move in mid-2019 are in line with the ECB’s guidance. Clearly, the ECB is continuing to take the foot off the accelerator, but officials are eager to keep market expectations from running too far ahead and in the light of the reaction on forex markets to the minutes the doves will likely keep the upper hand this month.

Brexit Noise Picking Up

Brexit-related noise and news are starting to pick up after a relatively quiet period over the holiday season, after a deal on divorcing terms was struck. EU representatives have displayed a cordial, open to negotiate front, though the presidents of the EU Commission, Juncker, and European Council, Tusk, have both this week emphasized that Britain would be welcome to re-join the EU if there was, in the words of the latter, a “change of heart.” In the UK, the so-called “Great Repeal Bill” ill is presently taking making its first showing in the House of Commons. Successful passage, which will subsume prevailing EU law into UK law, is expected to be a formality. Next up will be talks between London and Brussels on a transition period, which is earmarked by the EU side as being a two-year period following actual Brexit, on 29th March 2019, whereby the UK remains in the free trading area and in the customs union, but without voting rights, in order to buy time for new trading terms to be hammered and to make it easier for businesses with long-term planning horizons, such as airlines.

ECB’s Nowotny Said the EUR appreciation is not helping

Like Vice President Constancio Nowotny stressed that the ECB has no exchange rate goal, adding that the FX rates is “always volatile”, so that the recent appreciation “won’t necessarily be a permanent development”. He added however, that the “main reason for the recovery has been export driven and in that context of course also the exchange rate is something that has to be observed

ECB hawk Weidmann suggests rate hike won’t come before 2019

The Bundesbank President once again stressed his preference to end net asset purchases this year, but at the same time repeated his effort to play down the risk of a rate hike already this year, which flared up after the release of the minutes. Weidmann told Germany’s FAZ that expectations that rates won’t rise before the middle of next year “seem to be grosso modo in line with the current forward guidance of the ECB Governing council, which said that interest rates will only increase well beyond the end of net asset purchases”.

U.S. Chain Stores Fell

U.S. chain store sales fell 1.9% to 115.3 in the week ended January 13, nearly erasing the 2.0% bounce in the first week of January. The 12-month pace also slipped to 2.7% year over year, the slowest in seven weeks, from 3.8% year over year previously. Weather was a factor as the snow and ice storms in the Northeast and Midwest kept some consumers away from stores.