EUR/USD Daily Technical Analysis for January 23, 2018

The EUR/USD continued to form a consolidation pattern, as treasury yields have been on the ascent driving up European yields which have outpaced their U.S. counterpart. This comes amid signs of rising inflation, expectations for Fed rate hikes, and prospects of increased debt supply, taking the 10-year yield to the 2.66%, passing the 2016 peak of 2.64%, to the highest in nearly four years. However, the dollar index has yet to benefit from these bullish forces, declining to the lowest level in 3-years, as the yield differential moved in favor of the Euro.

Technicals

The EUR/USD is forming a bull flag continuation pattern which is a pause that refreshes higher.  Support is seen near the 10-day moving average at 1.2152.  Resistance is seen near the January highs at 1.2323.  A break of this level would lead to a test of the 2014 lows at 1.34.  Momentum is positive but the trajectory of the MACD (moving average convergence divergence) prints in the black with a flat trajectory.  The RSI (relative strength index) is moving sideways reflecting consolidation.

Bundesbank reports that the German economy continues to expand at high speed

Germany’s central bank said in its latest monthly report that while the economy continues to expand at a high speed, the growth rate in the last quarter of last year may have been slightly lower, with two bridge days in October weighing on activity. Despite this, “industrial orders and the labor market environment are just as excellent as sentiment among companies and consumers”. And while the most recent pick up in inflation was due to base effects from energy prices, for other inflation components, price growth “should be reinforced by increasing macroeconomic over-utilization this year”.

ECB Begins to Change Board and focus on Constancio succession

Eurozone finance ministers will launch the process to replace Vice President Constancio, whose term ends at the end of May. After Portugal’s finance minister got the post of Eurogroup head, Spain’s Guindos is widely tipped to replace Constancio. Keeping a member from a southern European country at the post it would help to clear the way for Germany to finally nominate an ECB President, when Draghi’s term ends late next year. Bundesbank President Weidmann is widely tipped to be a potential successor and with the ECB set to start eying rate hikes from the middle of next year the move towards a more hawkish central bank head would come timely.

Merkel and Schulz get backing from SPD members for coalition plans

After successful exploratory talks, SPD party delegates today backed formal coalition talks, which Schulz now hopes will be finalized quickly, leaving Germany on course for another grand coalition government under Chancellor Merkel. Less than 57% voted in favor, highlighting that the party is deeply split, but markets will still welcome the deal that will ensure continuity and give Germany finally a fully functioning government. For the ECB meeting on Thursday, the agreement means one less political risk for the Eurozone, which in theory would support the hawks, but at the same time the strengthening of the EUR will see the doves urging for caution.

SF Fed Williams Says Economy is Accelerating

SF Fed moderate Williams said economic tailwinds are being provided by financial conditions and confidence, along with tax cuts and the global economic environment. Indeed, he expects unemployment to fall to 3.7% late this year and view low inflation as “good news,” predicting it will return to 2% in the next 2-years. Williams said the Fed needs to get monetary policy back to normal and he doesn’t view the Fed as ahead of or behind the curve, but well-positioned to keep the economy on a sustainable path. While his remarks appear fairly balanced, he’s been bullish on the economic outlook of late, and would appear to support the 3-hike baseline scenario for 2018.