Euro Rebounds as FOMC Bias Disappointing to Dollar Bulls

The EUR/USD rebounded slightly as the dollar short squeeze petered out following the Fed’s statement following Wednesday’s monetary policy decision. The euro continue to climb despite a weaker than expected EU inflation report which is likely to keep the ECB on the sidelines for the foreseeable future.

Technicals

The EUR/USD edged higher but remains below resistance which is former support near the 200-day moving average at 1.2015.  Additional resistance is seen near the 10-day moving average at 1.2112. Support is seen near the December 2017 lows at 1.1715. Momentum is negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to a lower exchange rate. The fast stochastic generated a crossover buy signal in oversold territory which points to a potential rebound in the currency pair.

European Commission sees inflation rising slowly

The Commission’s spring economic forecast seemed to gloss over the latest weakness in survey indicators and sees ongoing expansion while admitting new risks. Growth rates are expected to remain strong this year and ease only slightly in 2019. The press statement highlights that unemployment is now at pre-crisis levels and unemployment is continue to decline, with the number of people in work in the euro area now at the highest since the introduction of the euro, although the Commission also highlights that some slack remains at least on an overall level. Consumer price inflation is weakened in the first quarter, but the Commission expects a slight pick up in coming quarters. Overall inflation for the Eurozone is expected to remain steady at 1.5% this year, before rising to 1.6% in 2019. In the EU the pattern is expected to be similar, but a tad higher, with 1.7% this year, 1.8% next.

Eurozone HICP inflation fell back

Eurozone HICP inflation fell back to just 1.2% year over year in April, from 1.3% year over year in the previous month. This confirmed that the uptick in March was mainly due to base effects from the earlier timing of Easter, which lifted holiday related prices. National data already indicated that expectations for a steady headline rate in April would turn out to be too optimistic. More importantly core inflation fell back to just 0.7% year over year from 1.0% year over year. Again, the Easter effect is partly to blame, with services price inflation falling to just 1.0% year over year from 1.5% year over year in the previous month and against that background our medium term inflation outlook has not changed and we don’t expect the central bank to scrap the intended exit from QE.

UK April PMI Services was Softer than Expected

UK April services PMI underwhelmed, bouncing back from weather-affected March weakness by a lesser extent than expected. The headline came in at 52.8, up from 51.7 in the month prior but short of the median forecast for 53.5. The breakdown also showed a moderation in price pressures, subdued new business growth, and while employment in the sector continued to rise, it was by the smallest gain since March 2017.

The ECB still pushing for banking union and risk sharing

Outgoing ECB Vice-President Constancio said in the statement of a central bank publication entitled “Financial Integration in Europe”, that “Euro area countries should forge ahead in enhanced cooperation in order to more rapidly achieve capital markets union”. The ECB urges steps towards risk sharing through a credible common fiscal backstop for the Single Resolution Fund and the introduction of a deposit insurance scheme. Politically though as long as political agents are not willing to tackle problems at national level and with anti-EU sentiment in countries such as Italy on the rise, there will be no appetite in countries such as Germany to back such a scheme.

The ECB’s Villeroy Said Slower French growth not a surprise

The French central bank head said the deceleration in growth in the first quarter of the year is due to balancing. So still an overall optimistic view on the economy and Villeroy said the Bank of France expects similar growth in corporate investment this year than in 2017 when it was close to 4%. At the same time, he said French corporate debt levels require vigilance. He already indicated last week that France’s financial stability high council is looking into potential additional measures to tame private debt, saying that bank loans to individuals and corporations “increase rapidly in France.