EUR/USD Daily Technical Analysis for August 28, 2017

The EUR/USD surged higher as the dollar lost ground following Janet Yellen’s speech at Jackson Hole which failed to discuss monetary policy. Yellen stuck to her topic which was financial regulation, which she defended in the wake of the financial crisis. Weaker than expected U.S. Durable Goods orders also buoyed the exchange rate.

Technicals

The EUR/USD moved higher testing resistance levels near 1.1910.  Support on the currency pair is seen near the 10-day moving average at 1.1782. The exchange rate is forming a cup and handle break out pattern and a close above the 1.1910 level would lead to a test of the July 2012 lows at 1.2130.  Negative momentum is decelerating as the MACD (moving average convergence divergence) index prints in the red but MACD histogram is moving higher with a positive trajectory which points to a positive crossover buy signal.

German GDP Remains Solid

German Q2 GDP was confirmed at 0.6% quarter over quarter, as expected. The breakdown showed that growth rested on domestic demand, with investment remaining robust, while Q1 investment daa was revised up markedly. Private consumption growth accelerated to 0.8% quarter over quarter from 0.4% quarter over quarter and contributed 0.4% points to the quarterly growth rate. Investment added a further 0.2% points, but net exports detracted -0.3% points as import growth surged higher. A further confirmation that the current recovery is unusually for Germany as it is not the export led recovery that we have seen in previous cycles. Rather it is domestic demand that is propping up growth, also thanks to the ECB and the policy of easy money, which is underpinning consumption as well as investment. The robust data will also back Weidmann’s calls for an end to QE though.

German Import Price Inflation Missed Expectations

German import price inflation came in lower than anticipated, with the annual rate falling back to 1.9% from 2.5% year over year in the previous month. Prices were down -0.4% month over month. The strong EUR is leaving its mark and will likely to continue to bring import price inflation down, with the annual rate now back below the ECB’s 2% mark.

German IFO Business Confidence Declined Less than Expected

German Ifo business confidence fell back slightly to 115.9 from 116.0 in the previous month. The drop back from the record high in July was less pronounced than feared and the breakdown showed a very encouraging jump in business expectations, which nearly compensated for the decline in the current conditions indicator. The breakdown showed sentiment improved both in both construction and manufacturing. Retail sentiment fell back in August, however, but could also have been impacted by weather conditions.

U.S. Government Shutdown odds are on the Rise

U.S. government shutdown odds were on the rise even before Trump threw down the gauntlet over the Mexican Wall budget. Goldman has them at 50/50, while a “top Republican source” pegged them as high as 75%. At a minimum that could well push tax reform into next year and it may be better to get the internal shutdown spat out of the way sooner than later, while Democrats will stonewall and let conservatives duke it out.

House Speaker Ryan said the White House and Congress are on the same page. Tax reform was a key promise during the election and Ryan said Republicans will keep their word. He also confirmed the debt limit will be increased before the ceiling is hit, stating “I know we will get this done.” On tax reform, he said they are working hard on it. He wants a permanent reduction in tax rates, but the overhaul may have some temporary provisions. They are looking to maintain mortgage deductions even while simplifying the code.

Cleveland Fed’s Mester still supports a gradual normalization policy path as she sees above trend growth in the economy and a strong labor market. She has not included any fiscal policy stimulus in her forecasts. Businesses are in a “wait-and-see” mode she added. She sees risks in the low rate structure. She doesn’t want to wait for inflation to get to 2% before acting. The Fed needs to act pre-emptively. The potential for a government shut-down won’t impact her outlook, which is more medium to longer-term looking.

U.S. Durable Goods Orders Dropped in July

U.S. durable goods orders dropped 6.8% in July after jumping 6.4% in June from unchanged in May which was revised from -0.1%. Transportation orders fell 19.0% following June’s 19.5% surge which was revised from 19.0%. Excluding transportation, orders were up 0.5%. Nondefense capital goods orders excluding aircraft edged up 0.4% from unchanged which was revised from -0.1%. Shipments rose 0.4% from June’s unchanged print. Nondefense capital goods shipments excluding aircraft climbed 1.0% from 0.6%. Inventories increased 0.3% from 0.5% previously which was revised from 0.4%. The inventory-shipment ratio was steady at 1.68.