EUR/USD Daily Technical Analysis for August 3, 2017

 

The EUR/USD continued to climb as yields in Europe backed up, and the interest rate differential between Bunds and U.S. treasuries moved in favor of the Euro.  The market is pricing in a Fed that will be on hold for the balance of 2017, and an ECB that will likely describe how they will reduce QE when they next meet in August.

Technicals

The EUR/USD to fresh 2-year highs hitting a high of 1.1910, and poised to test target resistance near the December 2014 highs at 1.2569.  Support on the currency pair is seen near the 10-day moving average at 1.1724. Momentum is positive as the RSI (relative strength index) continues to hit fresh highs, but the currency pair is overbought, as the index is printing a reading of 75, above the overbought trigger level of 70 which could foreshadow a correction.  Additionally, the MACD (moving average convergence divergence) histogram is printing in the black with an upward sloping trajectory which points to a higher exchange rate.

Eurozone PPI Dipped in July

Eurozone PPI inflation fell back to 2.5% year over year from 3.4% year over year in the previous month. Much of the decline was due to energy prices, which had less of an inflating role in June, as energy price inflation fell back to 2.9% Year over year from 3.5% year over year in the previous month. Excluding energy the PPI rate eased to 2.2% year over year from 2.4% year over year. More arguments then for the doves at the ECB, which are still urging caution in the light of subdued underlying inflation pressures.

ADP Private Payrolls Rose Less than Expected

The 178k July ADP rise undershot expectations of a 190k rise in private payrolls, following a big 33k boost in the June rise to 191k from 158k that reversed the gap to the 187k private payroll rise in that month. We saw a lean 4k July goods employment rise despite still-firm factory sentiment readings, with gains of 6k for construction and 3k for mining but a 4k drop for factories, alongside a largely expected 174k service job gain. The “as reported” ADP figures have overshot private payrolls in every month since the October methodology change except April and June, and perhaps now in August, to leave an average overshoot of a hefty 47k and an average monthly 2017 gain of 217k. We saw undershoots of 29k in June and 17k in April, though with a 94k interim overshoot in May, and prior overshoots of 204k in March, 76k in February, 42k in January, 3k in December, 38k in November, and 15k in October. The ADP as-reported average absolute error since the 2016 methodology change is 58k, versus a 35k average absolute error for the survey median. See Monday’s commentary for a discussion of the risks for Friday’s jobs report.

The MBA Mortgage Market Declined

U.S. MBA mortgage market index sank 2.8% in data released earlier, accompanied by a 2.0% drop in the purchase index and a 3.8% decline in the refinancing index for the week ended July 28. This weighed on the dollar. Yet the average 30-year fixed mortgage rate remained unchanged at 4.17%. In general, financial conditions have remained relatively relaxed through the Fed tightening cycle and this has done less to restrain housing than inventory tightness.

UK Construction PMI Missed Expectations

The UK’s July construction PMI missed expectations, falling to 51.9 in the headline reading from 54.8 in June, and well off the median forecast for a much more moderate decline to 54.0. The outcome is the lowest since August last year, and shows a marked deceleration in the pace of expansion. New orders declined, the pace of job creation ebbed to an 11-month low, and commercial projects fell at the quickest pace in a year, and overall new business volumes contracted for the first time since the post Brexit vote rebound began in September last year. Optimism in the construction sector was the lowest since July last year, which was blamed on economic uncertainty. Investors will now be looking to the release of the services PMI, tomorrow, with the sector accounting for about 80% of UK GDP.

The BoE’s monetary policy meeting, the first in nearly two months, starts today and announces on Thursday. The prior meeting in June produced a hawkish surprise with three MPC members dissenting in favor of hiking the repo rate by 25 basis points to 0.50%, a move which would reverse the emergency rate hike of last August. The consensus expectation is for the BoE to refrain from hiking once again, albeit with two or three members remaining in dissent.