EUR/USD Daily Technical Analysis for July 18, 2017

European yields moved lower but underperformed U.S. treasuries which allow the EUR/USD to bounce from its lows and close near the highs of the North American trading session. The yield differential continued to move in favor of the Euro, following Yellen’s dovish testimony in front of Congress last week that will likely keep the Fed on hold until December. Currently the September Fed fund futures contract is pricing in an 8% chance of a move in September.   The ECB meeting on Thursday is likely to headline the week, where Draghi is likely to stick to the June script and try to calm tapering nerves. Indeed, the drop in Eurozone HICP inflation to just 1.3% year over year in June will add to the arguments of the doves at the ECB and Eurozone spreads are coming in this morning as peripheral bond markets outperform.

Technicals

The EUR/USD closed at a fresh 14-month high and is now poised to test target resistance near the May 2016 highs at 1.1616. Support on the currency pair is seen near the recent breakout which coincides with the 10-day moving average at 1.1414.  The consolidation has created a bull flag pattern which is a pause that refreshes higher.  Momentum is neutral as the MACD (moving average convergence divergence) histogram prints near the zero index level with a flat trajectory which reflects consolidation.

All Eyes on the ECB

Traders will focus on the ECB and look for direction from the central bank.  Officials have provided conflicting views, but Draghi has been relatively bullish. The ECB is widely expected to be heading for tapering its quantitative easing program at the beginning of next year, although Praet and Draghi are wary of committing prematurely to exit steps and have been instrumental in keeping the QE easing bias in place. For now volatility will continue to react to the mix ed ECB speak and will support Draghi and Praet who will want to maintain at the helm for now. They are likely to point to the September meeting as the right time to tweak the forward guidance again. That will give Draghi the chance to use the August Jackson Hole central banker meeting to prepare the markets for a reduction in QE, as well as try to stress that policy will remain accommodative, even at reduced QE levels, rather than as the start of tapering.

EMU Inflation was Confirmed

Final June EMU HICP inflation was confirmed at 1.3% year over year, in line with the preliminary number and down from 1.4% year over year in May. The breakdown confirmed that the deceleration in the headline rate was mainly due to lower energy price inflation, which dropped back to just 1.9% year over year from 4.5% year over year in the previous month. Services price inflation meanwhile accelerated to 1.6% year over year. Still, while core inflation moved up from the 0.9% year over year in May, at 1.1% year over year it remains far below the ECB’s 2% limit for price stability and prices for non-energy industrial goods rose just 0.4% year over year, so plenty there for the doves at the ECB to argue with.

China GDP Increased More than Expected

China’s gross domestic product increased 6.9% in the Q2 on a year over year basis matching the results posted in the Q1, according to the National Bureau of Statistics. The number beat expectations of an increase of 6.8%. China saw larger than expected trade numbers last week, which gave some insight into the GDP report.  The second quarter numbers put the economy on a strong footing to meet China’s growth target of around 6.5% in 2017, which would give policymakers room to defuse financial risks.

U.S. Empire Manufacturing Dropped More than Expected

U.S. Empire State manufacturing index dropped 10.0 points to 9.8 in July, lower than expected, after rebounding 20.8 points to 19.8 in June. The latter was the highest since September 2014. Declines were broad-based. The employment component fell for a third consecutive month, sliding to 3.9 from 7.7, with the workweek at unchanged from 8.5. New orders fell to 13.3 from 18.1. But, prices paid edged up to 21.3 from 20.0, with prices received at 11.0 from 10.8. The 6-month general business outlook index eased to 34.9 from 41.7, with employment at 11.8 from 12.3. The future new order index was 33.4 from 42.2, with prices paid at 30.7 from 33.1 and prices received at 15.7 from 13.8. Capital expenditures are at 15.0 from 20.8, with technology spending at 11.8 from 11.5.