EUR/USD Daily Technical Analysis for July 20, 2017

The EUR/USD edged lower as European government bonds traded higher and yields retraced relative to their U.S. counterparts. The decline in EU yields against treasuries weighed on the forward curve putting pressure on the currency pair. The message from the ECB tomorrow is likely to be little changed from June, but reports that officials are preparing tapering options for a decision in the fall has seen Eurozone peripheral debt and equity markets underperform.

Technicals

The EUR/USD edged back from Tuesday highs which saw the currency pair break out to fresh 13-month highs.  Support is seen near the 10-day moving average at 1.1450. Resistance on the currency pair is seen near the May 2016 highs at 1.1616.  Prices could now consolidate and form a bull flag pattern which is a pause that refreshes higher. Momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the spread (the 12-day exponential moving average minus the 26-day exponential moving average) crosses above the 9-day exponential moving average of the spread.  The index moved from negative to positive territory confirming the buy signal.

Eurozone Construction Output Dropped in May

Eurozone construction output dropped -0.7% month over month in May, bringing the annual rate down to 2.6% year over year from 3.3% year over year in the previous month. Not a closely watched indicator, but the still robust annual rate backs the view that the recovery remains on track, despite the set back over the month.

The ECB Will Decide on QE in the Fall

The ECB will decide on QE in the fall according to reports.  The source story from Bloomberg suggests the analysis doesn’t mean a stimulus change is imminent, as the QE schedule has already been set out for the rest of the year. There haven’t been formal discussions on the future of the program and officials have limited appetite for any significant change in their policy language for now, as they agree that the ECB needs to move carefully, amid the risk of fresh taper tantrums. The central bank meets tomorrow and these issues should become clearer.

The ECB’s Villeroy said that the Central Bank Has Defeated Deflation Risks.

The French central bank head repeated the ECB’s message from June, namely that deflation risks have disappeared, which back then Draghi took as the justification for the removal of the easing bias on rates. Villeroy also suggested that Brexit represents opportunities for the Eurozone, which ties in with reports that France, in particular, is hoping to pick up business from London’s financial center and is less inclined than Germany to make concessions in the Brexit negotiations, even though it is clear that a hard Brexit would prove a challenge for both sides of the channel.

U.S. TIC flows Saw Net Inflow

Foreign accounts bought a net $57.3 billion U.S. asset in May, from a revised $74.4 billion in April which was $65.8 billion. Also, overseas accounts bought $91.9 billion in net long-term U.S. assets versus $9.7 billion in May which was revised from $1.8 billion. Private accounts purchased $81.1 billion in Treasury coupons, while official accounts sold $35.7 billion. The biggest buyers of Treasury notes and bonds were “All Others” with $10.2 billion, followed by China at $10.0 billion, and the Cayman Islands at $9.3 billion. The largest sellers were Turkey at -$6.9 billion and Germany at -$6.4 billion. The 10-year Treasury yield ended slightly lower in May at 2.20% from 2.31% on May 1 and a high of 2.415% on May 10.

U.S. Housing Starts Rebounded in June

U.S. housing starts rebounded 8.3% to a 1.215 million pace in June, better than forecast, after the 2.8% decline in May to 1.122 million which was revised up from 1.092 million. The gain breaks a string of three straight monthly declines, and it’s only the second increase of the year. Single family starts rose 6.3% versus -2.9% previously which was revised from -3.9%, while multifamily starts jumped 13.3% from -2.4% which was revised from -9.7%. Building permits increased 7.4% to 1.254 after falling 4.9% to 1.168 million which was revised from 1.168 million. Regionally, starts surged in the Northeast and in the Midwest, and were up in the West, while they declined in the South. Housing completions improved 5.2% to 1.203 million after increasing 4.2% to 1.144 million.