The Euro Forms Bull Flag Pattern a Pause that Refreshes Higher

The EUR/USD was nearly unchanged on Friday as Europe and North America took a pause to celebrate the Good Friday holiday.  Stronger than expected economic data released in the U.S. in the wake of the Fed’s decision to increase interest rates buoyed the greenback.

Technicals

The weekly chart of the EUR/USD shows prices are moving sideways and forming a bull flag pattern which his a pause that eventually refreshes higher. Following the breakout above former resistance now support at 1.2090, prices have been rangebound.  Momentum is negative to neutral on a weekly basis. The MACD generated a crossover sell signal, but the trajectory of the MACD histogram is moving sideways reflected consolidation.

ECB Shifting Focus to Rate Hikes as QE Nears End

Another round of weak confidence data, a surge in volatility and fragile market sentiment, coupled with still low headline inflation numbers may have added to pressure on yields since the start of February. The ECB will begin phasing out QE this year and indeed, officials have already moved the goal post as hawks like Weidmann start to focus on rate hike scenarios for 2019.

French, Italian HICP higher than expected in March. After the weaker than anticipated Spanish and German numbers, French and Italian HICP rates surprised on the upside. In France prices were up 1.7% year over year in March, versus 1.3% year over year in the previous month, while the Italian rate jumped to 1.1% year over year from 0.5% year over year. The earlier timing of Easter and the exceptionally cold winter meant food prices contributed to the acceleration in the total headline rate and the breakdown for Italy showed food price inflation at 1.3% year over year, versus -0.9% year over year in February.

Fed’s Harker expects two more rate hikes this year

Fed’s Harker expects two more rate hikes this year. The Philly Fed president explained it was the firming in inflation that caused him to revise his rate projection. And in his written remarks this afternoon on U.S. Business Dynamism in Decline, he indicated he expects inflation to reach and exceed the 2% target by the end of 2019. He also thinks the jobless rate can fall to as low as the 3.5% range next year. GDP growth, however, is projected at 2.6% this year and 2.4% next.

Atlanta Fed’s Q1 GDPNow estimate rebounded to 2.4%, now much closer to the 2.5% Economist median. “The GDPNow model estimate for real GDP growth in the first quarter of 2018 is 2.4 percent on March 29, up from 1.8 percent on March 23. The forecast of the contribution of inventory investment to first-quarter real GDP growth increased from 0.66 percentage points to 1.21 percentage points.

The 3-month Libor increases remain relentless, rising for a 27th straight session to 2.31% on Thursday fixing, from the prior 2.308% fixing. This is the longest string of gains since November 2005, which was a 50-day mark. The rate is now at the highest since November 2008. The 3-month rate started the year at 1.697%. Of course much of the increase has been propelled by the FOMC’s normalization policy including rate hikes and unwinding of QE, and expectations of further tightening down the road.