EUR/USD Daily Technical Analysis for August 15, 2017

Geopolitical risks abated on Monday as stocks gained traction as safe haven assets started to contract.  Last week’s softer than expected inflation released in both the U.S. and Europe, did little to help put pressure on central banks to make a move. The ECB is on vacation but recent events will do little to change Draghi’s reluctance to commit to the further QE schedule just yet. The current program runs out at the end of the year and so far, Draghi has only indicated that the future of asset purchases will be clarified in the fall. The dollar is being slightly stronger as traders await this week’s retail sales report.

Technical

The EUR/USD edged lower as the dollar gain traction, but the currency pair remains in a tight trading range forming a cup and handle pattern which is a pause that usually refreshes higher.  Support on the currency pair is seen near the 10-day moving average at 1.1801. Target support on a break down is seen near the 50-day moving average at 1.1471. Resistance is seen near the August highs at 1.1910.  Momentum on the currency pair has recently turned negative as the MACD (moving average convergence divergence) index generated a crossover sell signal. This occurs as the spread (the 12-day exponential moving average minus the 26-day exponential moving average) crosses below the 9-day exponential moving average of the spread. The index moved from positive to negative territory confirming the crossover sell signal. The MACD histogram is printing in the red with a downward sloping trajectory which points to a lower exchange rate. The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, is poised to break down, below support which would reflect accelerating negative momentum. The current reading on the RSI has declined from overbought territory and is currently printing a reading of 62, which is on the upper end of the neutral range.

Eurozone Industrial Production Contracted in June

Eurozone industrial production dropped -0.6% month over month in June, in line with expectations. The annual rate decelerated to 2.6% year over year from 3.9% year over year, but the correction in June still left production up 1.2% quarter over quarter in Q2, after just 0.1% quarter over quarter in the previous quarter. No sign then that quarterly GDP growth will be revised down from the 0.6% quarter over quarter reported with the preliminary number. So markets should see through the monthly correction, especially as PMI readings continue to suggest ongoing robust growth going ahead.

Japan GDP Was Stronger Than Expected

Japan’s Q2 GDP surged 4.0% in Q2 quarter over quarter following a revised 1.5% which was +1.0% growth pace in Q1. The increase in Q2 was much stronger than the 2.5% expected by analysts. Strong consumption growth led Q2 GDP growth, as private consumption improved 0.9%. Business investment grew 2.4% in Q2. Hence, domestic demand was quite firm in Q2, which was a surprise. Net exports were a modest drag on growth.

Chinese Industrial Production was Weaker Than Expected

Chinese reported softer than expected Industrial Production and Retail Sales on Monday, showing that the world’s second largest economy might have contracted in the Q3. Industrial production grew at a 6.4% year over year pace in July, down from 7.6% in June and below expectations that IP would increase by 7.1%. Retail sales increased at a 10.4% year over year, again falling shy of growth in June which was 11%, and lower than forecasts that retail sales would increase by 10.8%. Fixed asset investment, or spending on infrastructure and property, rose at an 8.3% year over year in the first seven months of the year, down from a forecast 8.6% rise.

UK Sentiment on the Economy is Weak

The UK economy has been and is likely to continue to underperform the Eurozone and other peers. The latest Reuters poll found a strong consensus among 70 analysts for the BoE to leave monetary policy on hold until 2019, and found that the consensus view was for UK growth to continue to lag Eurozone growth, with risk of recession pegged at 20% for the coming year. Fundamental Brexit uncertainties remain, and much will depend on the UK government, which continues to favor a “hard” exit, negotiating a transition period following the Brexit D-day in 2019, which would buy the UK the necessary time to negotiate a new trading deal with the EU.