EUR/USD Daily

European yields dropped sharply, and the Euro soared as risk aversion spiked after North Korea launched a test missile that flew over Japan before plunging into the sea and as tropical storm Harvey continues cause havoc in the U.S. Eurozone peripherals underperformed amid the fresh wave of risk aversion and Italian and Portuguese long bonds moved higher. Stronger than expected German consumer confidence as well as robust consumer spending out of France were shrugged off as the focus returned to geopolitical risks. Weak U.K. house price data meanwhile added to Gilt outperformance.

Technicals

The EUR/USD surged higher following the missile launch tested by North Korea.  The currency pair continued to move above former resistance now support at 1.1910. Resistance is seen near the December 2014 highs at 1.2222. Momentum has turned positive as the MACD (moving average convergence divergence) index recently generated a crossover buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal.

French Consumer Spending Rebounded

French consumer spending rebounded in July and rose 0.7% month over month, after falling -0.7% month over month in June. This brought the annual rate to 2.1% year over year from 0.7% year over year, a further sign that consumption is continuing to underpin growth, although PMIs suggest manufacturing and exports are also making progress, which in turn is supporting the labor market and ultimately consumption, especially as inflation remains below the Eurozone average.

French GDP Rose

French Q2 GDP was confirmed at 0.5% quarter over quarter in line with the preliminary number and unchanged from Q1. The annual rate was revised slightly down to 1.7% year over year from 1.7% year over year, but this is still a clear improvement from the 1.1% year over year registered in the first quarter of the year. Export growth boosted growth and was up 2.5% quarter over quarter, against a mere 0.4% quarter over quarter rise in import growth. Private consumption growth accelerated to 0.3% quarter over quarter from 0.1% quarter over quarter, and while investment growth fell back compared to the first quarter, it remained robust at 0.7% quarter over quarter.

German Consumer Confidence Unexpectedly Improved

German GfK consumer confidence unexpectedly improved to 10.9 in the September projection, from 10.8 in August. The breakdown, which is only available for August, shows a renewed pick up in income expectations and the willingness to buy, even though economic expectations actually fell back markedly in August. The willingness to save meanwhile dropped with price expectations. Another very strong German confidence number that confirms that economic activity remains very strong over the summer quarter.

UK Housing Prices Declined in August

UK house prices fell 0.1% month over month in the August Nationwide price index after 0.2% month over month growth in July which was revised down from 0.3% month over month. Prices rose 2.1% in the year over year comparison, down from 2.9% year over year in July, and well off the median forecast for annual growth of 2.5%. Inflation, stemming from the 18%-odd decline the pound has seen versus the euro since the Brexit vote last June has been eroding real incomes. CPI was running at a rate of 2.6% year over year, up from 0.6% year over year in July 2016. While supply remains chronically curtailed in the UK residential property market, the decline in household finances has whittled away at demand. More of the same looks likely, and we are anticipating negative year over year price readings before long.

Junker Warned the British Government to Start Negotiating

Junker warned the British government start negotiating “seriously”, warning that there is an “enormous” amount of issues that need addressing. Junker, president of the European Commission, said that he read “with the requisite attention all the papers produced by the British government” and stated that, “none of those is satisfactory.” He re-emphasized that divorcing terms must be settled before negotiations on the new economic and trade relationship can start. It’s becoming increasingly apparent that the Brexit process will take a lot longer than the two years designated under Article 50. The UK government is angling for a hard Brexit, and is hoping for a transitional period between Brexit D-day and when a final trading agreement can be arranged, which would extend access to the customs union and the single market. The opposition Labour Party is pitching a soft Brexit, which would maintain membership of the customs union and access to the single market, but at the concession of allowing free labor movement.

U.S. chain store sales rose 0.4% in the week ended August 26, according to The Retail Economist data. That follows a 0.2% gain in the prior week. Annual sales accelerated to a 2.4% year over year clip from 2.0% year over year. Sales over Q2 rose 1.6% year over year, better than forecast and the strongest since Q4 2014. Electronics paced the retail segment, posting its best performance since March.