EUR/USD Daily Technical Analysis for March 5, 2018

The EUR/USD moved higher for a second consecutive trading session as U.S. yields fell back following inflation data earlier in the week that showed that current pricing of U.S. yields reflects current inflation expectations.  This was somewhat countered by softer than expected EU PPI and German Retail Sales.

Technicals

The EUR/USD pushed through resistance near the 10-day moving average at 1.2295, which is now seen as support.  Resistdance is seen near the February highs at 1.2557.  The fast stochastic generated a crossover buy signal, which prices were oversold which could lead to an additional rebound as momentum is accelerating. The MACD on the other hand is printing in the red with a rising trajectory which reflects consolidation.

Eurozone Producer Prices Fell Back

Eurozone PPI inflation fell back to just 1.5% year over year in January, from 2.2% year over year in the previous month. The breakdown showed that the deceleration was entirely due to lower energy price inflation, which fell back to 0.5% year over year from 2.7% year over year in the previous month, with the reading excluding energy holding steady at 1.9% year over year. Still, with German import price inflation also falling in January and headline Eurozone HICP slipping back to just 1.2% year over year with the preliminary February reading, the number rounds off an overall weak data round on the inflation front, which will add to the arguments of the doves at the ECB and backs our view that there will only be minor tweaks to the ECB guidance next week.

German retail sales unexpectedly dropped

German retail sales unexpectedly dropped again in January, with sales down -0.7% month over month, against expectations for a rebound from the sharp correction in December. The December number was revised up to -1.1% month over month from -1.9% month over month and the annual rate jumped to 2.3% year over year from -0.2% year over year in December, but the ongoing monthly corrections are worrying.

German import price inflation fell back

German import price inflation fell back to 0.7% year over year in January from 1.1% year over year in the previous month. The dip is in line with expectations and partly due to the strong EUR, which is cutting the import bill. The breakdown showed annual energy price inflation actually accelerating but import prices for capital goods as well as consumer goods dropped sharply.

ECB seen making only small tweaks to guidance next week.

Surveys confirm that central bank watchers are pushing back expectations for a major change in guidance amid ongoing market volatility, a still strong EUR and dovish data releases including weak confidence data and a dip in headline HICP to just 1.2% year over year.

Germany’s Merkel finally on home stretch

Germany’s Merkel finally on home stretch for another term in office. It has been a long and drawn out process, but Germany is now about to clear that last hurdle for the confirmation of another grand coalition government under Chancellor Merkel. Merkel’s CDU had to concede major posts, including the Finance Ministry to the SPD, but until about 2 weeks ago there were still some doubts whether SPD party members would endorse the coalition. With the result of the member vote due to be published on Sunday, polls are now suggest rising support in favour of GroKo not just among party members, but also the wider population, not necessarily because people are enthusiastic about the prospect of another 4 year’s cooperation among Germany’s 2 major parties, but because it is seen as the lesser evil amid the realization that another round of elections is unlikely to bring a decisively different outcome.

Italian election unlikely to rock the boat.

Italy is heading for general elections on Sunday and while bond markets have registered some jitters in the run up to the votes things have been looking pretty calm. The result is unlikely to be clear cut and coalition forming likely to be complicated, and drawn out even by Italian standards. For markets though the main message is that the populists are unlikely to get a shot in office given the country’s complicated political system and fragmented party structure and that no major party is openly advocating an exit from the Eurozone.

The February UK construction PMI survey beat expectations

The February UK construction PMI survey beat expectations, rising to 51.4 in the headline reading after 50.2 in the month prior. The median forecast had been for a much modest rebound to 50.5. The report still paints a pretty bleak picture of the sector, with total business activity only modestly higher while new work fell for a seventh consecutive month.