EUR/USD Daily Technical Analysis for July 10, 2017

The EUR/USD moved lower as the dollar gained traction on Friday following a stronger than expected U.S. payroll report that lifted U.S. yields relative to their European counterparts paving the way for a stronger dollar. Both German and French Industrial productions were stronger than expected, but were overshadowed by the U.S. payroll report.

Technicals

The EUR/USD edged lower following the stronger than expected U.S. jobs report, despite ECB officials keeping a hawkish tone. The currency pair is still forming a bull flag pattern, which is a pause that refreshes higher.  Support is seen near the 10-day moving average at 1.1366, while resistance is seen near the June highs at 1.1444. Momentum is neutral with the MACD histogram printing in the black with a flat trajectory that reflects consolidation.

Non-farm Payrolls Beat Expectations

U.S. nonfarm payrolls increased 222k in June after rising 152k in May which was revised form 138k and 207k in April which was revised from 174k, for a net 47k upward revision. The unemployment rate edged up to 4.4% versus 4.3% previously. The labor force rebounded 361k following the prior 429k drop, while household employment climbed 245 from the prior -233k. The labor force participation rate improved to 62.8% from 62.7%. Average hourly earnings were up 0.2% last month versus May’s 0.1% gain which was revised from 0.2%.

The workweek increased to 34.5 from 34.4. Private payrolls increased 187k (ADP was 158k), with the goods producing sector adding 25k, while jobs in manufacturing inched up 1k, and construction up 16k. The service sector added 162k workers. Government jobs rose 35k. The strength in the report will keep the FOMC on its normalization path.

French Industrial Production was Stronger Than Expected

French industrial production jumped 1.9% month over month in May, bringing the annual rate to 3.2% year over year from just 0.1% year over year in the previous month. Manufacturing production rose 2.0% month over month, and 3.3% year over year. The data ties in with the stronger than anticipated German figure at the start of the session and adds to signs of strong second quarter growth in the Eurozone.

German Industrial Production was Stronger than Expected

German industrial production stronger than expected, rising 1.2% month over month in May, much more than anticipated after the correction in orders data the previous month. Energy production remained strong, while manufacturing growth picked up after two weak month, which helped to compensate for the correction in construction production. The annual rate improved to 5.0% year over year and data confirm expectations for a strong second quarter GDP growth rate, leaving Germany on course for an ongoing robust recovery.

The ECB mulls ending the Asset Back Securities purchase program.

According to a Bloomberg report policy makers are considering ending the ABS purchase program when they outline the policy course for next year. Reportedly officials agree that the program hasn’t revived the market for asset backed securities, but officials are worried that ending the program could send the wrong signal to markets already in the grip of taper concerns.

ECB’s Coeure suggests QE scale back has already begun, stressing in an interview with Le Monde and La Stampa that the decision from last December to scale back monthly asset purchases to EUR 60 billion from EUR 80 billion was an indication of how the ECB can slowly reduce stimulus “without undermining the support given to the economy”, adding that “if needed the Governing Council will continue to adjust its instruments both qualitatively and quantitatively”. Coeure highlighted, however, that “when this is needed, it should do so carefully and flexibly, and based on what matters” for the ECB namely “the inflation outlook”. Back last December, ECB officials stressed that the reduction of monthly purchase volumes didn’t amount to “tapering” per se, as it was not intended to be the start of a phasing out of QE, this time around that will be very difficult to maintain, although this might exactly be the reason why Draghi and Praet remain reluctant to drop the easing bias on QE as markets price in reduced monetary support.

The ECB’s Knot said that reflation has “clearly” replaced deflation, adding that deflation risks have gone, according to a Bloomberg interview. That the deflation risk has disappeared was already given at the last ECB meeting as the reason behind the decision to drop the easing bias on rates, but in the current climate the comments will only add to tapering concerns. Still, Knot stuck to the official script and added that in order to sustain the positive developments “a substantial degree of accommodation will continue to be needed”, stressing that “there is a consensus on that on the Council”.