EUR/USD Daily Technical Analysis for July 11, 2017

The EUR/USD edged lower initially but rebounded during the North American trading session as yields in Europe came off their lows.  The focus will be on the ECB moving forward and any change in communication in the near term will only mean a move towards a full neutral stance. It seems the decision to clear the policy path for this year and adopt a firm easing bias early in the year is coming back to haunt officials, which are struggling to coordinate communication and stop markets running away with tapering talk prematurely.

Technicals

The EUR/USD consolidated but rebounded from its lows finding support near the 10-day moving average at 1.1385.  Resistance on the currency pair is seen near the June highs at 1.1444.  Momentum is neutral as the MACD (moving average convergence divergence) histogram is printing in the black with a flat trajectory which reflects consolidation.  The picture is similar for the relative strength index( RSS), which is chopping around near the 63 level which is on the upper end of the neutral range, but the trajectory reflects consolidation.

Eurozone Investment Sentiment Declined in July

Eurozone Sentix Investor Confidence falls back in July, with the total reading declining to 28.3 from 28.4 in the previous month. The indicator for the current situation still improved to 37.3 from 36.0, but the expectations index fell back to 19.8 from 21.0, the first decline since February.

The ECB seen steady over the summer.

Comments from Bank of France governor Villeroy over the weekend seem to confirm that the central bank will refrain from policy and guidance changes at the July meeting and wait until September, when the next set of forecasts are due to decide on whether to tweak its stimulus settings. At the same time ECB Chief Economist Praet said in a newspaper article that “we still need a long period of accommodative policy”, in what looks like a fresh attempt to calm the nerves of investors, after some hawkish comments saw Eurozone yields rising last week.

Germany Posted  A Higher than Expected Trade Surplus

Germany posted a trade surplus of EUR 20.3 billion in May, slightly higher than the EUR 19.7 billion in the previous month. Exports rose 1.4% month over month on a seasonally adjusted basis, up from 0.9% month over month in April, while import growth stagnated at 1.2% month over month. The three months accumulated figure eased slightly, is now below the total for Q1, which suggests trade is not making much of a contribution for Q2 GDP. Indeed, accumulated data for the first five months of the year show the total current account surplus falling back to EUR 98.0 billion from EUR 110.3 billion last year, while the trade surplus narrowed to EUR 100.1 billion from EUR 104.8 billion in the corresponding period 2016.

Listen to Draghi and Praet

The ECB may have recently published a research report suggesting that markets on the whole understood the central bank’s communication policy, but with the central bank heading for the exit, central bank comments over the past weeks have only added to volatility on markets. Fact is the central bank has effectively settled this year’s monetary policy path in advance, when it set monthly asset purchase volumes at EUR 60 billion for the duration of 2017. Looking ahead few doubt that real tapering will start early 2018 and so far the ECB maintains that rates won’t rise before the end of QE. So the current swing in markets is not so much due to changes in the expected path of actual policy, or degree of monetary accommodation, but rather the communication that has been somewhat misleading.

The key players to listen to are clearly Praet and Draghi, with the former effectively setting the tone for council meetings in his introductory comments at the start of the meeting. Today’s minutes confirmed that the pressure to remove the easing bias had increased with positive survey data and the broadening and strengthening of growth. True, the brief uptick over the Easter period aside, inflation remains far below the 2% limit and wage growth is low, but with the recovery strengthening and broadening, the easing bias looked increasingly anachronistic.