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EUR/USD Daily Technical Analysis for July 21, 2017

By:
David Becker
Published: Jul 20, 2017, 18:16 UTC

The EUR/USD broke out to fresh 23-month highs following the ECB commentary following their interest rate decision. While many interpreted Draghi’s

ECB

The EUR/USD broke out to fresh 23-month highs following the ECB commentary following their interest rate decision. While many interpreted Draghi’s comments as dovish, he announced that the ECB would look at reducing QE volume in the fall. They did not say they would make a change. Initially, Bunds jumped in price but then reversed course allowing the Euro to surge to new highs.  Producer prices also contracted which should give the ECB more time to make any adjustments given their mandate is price stability.

Technicals

The EUR/USD broke out, slicing through the May 2016 highs at 1.1616, and poised to test the August 2016 highs at 1.1712. Support is seen near former resistance at 1.1616, and then the 10-day moving average at 1.1314. Momentum surged higher as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory that points to higher prices.  The RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum, moved higher with price action and broke out which reflects accelerating positive momentum. The only caveat is that RSI is printing a reading of 73.5, which is above the overbought trigger level of 70 and could foreshadow a correction.

eur-072017

ECB Left Policy Unchanged

ECB leaves policy and guidance unchanged and did the expected and left policy rates as well as QE volumes unchanged, it also repeated that rates will remain at current levels for an extended period and that QE can be increased in size and duration if the outlook worsens. So, the easing bias on QE has been left untouched for now, with no sign in official language so far that the ECB is moving towards tapering. Indeed, the central bank also repeated that rates will remain at present level well past the end of QE, which means there won’t be a rate hike before asset purchases have ended and QE will run until the inflation path has sustainably adjusted.

Draghi Appears to be Dovish

Draghi repeats easing bias on QE remains in place , and that despite the broadening of the recovery, headline inflation pressures remain subdued and economic expansion has yet to feed through to prices. Against that background a very substantial degree of accommodation is still needed even if incoming data confirm the strengthening of the economy. So far pretty much the dovish line from the initial statement on rates, but Draghi also said that the ECB measures preserve the favorable conditions that are needed, which confirms that despite the fact that the easing bias on rates remains in place, the ECB is unlikely to add additional measures.

German PPI Contracted

German PPI inflation fell back to 2.4% year over year in June, from 2.5% year over year in the previous month. A tad higher than anticipated, but still continuing the recent downtrend as oil prices turn out to be weaker than previously thought. Headline Eurozone inflation also fell back in June as energy price inflation eased, so there is no really new message from the German PPI numbers, although at 2.4% year over year, the numbers remain elevated.

Eurozone Current Account Widened

The Eurozone current account surplus widened to EUR 30.1 billion in May on a seasonally adjusted basis, from EUR 23.5 billion in the previous month. The main reason for the improvement was a markedly lower deficit in the secondary income balance. The goods balance improved slightly, while the services surplus narrowed. The unadjusted financial account showed direct and portfolio investment inflows of EUR 12.4 billion in May, and accumulated inflows of EUR 543.0 billion in the 12 months to May this year, down from EUR 582.7 billion in the 12 months to May 2016.

Jobless Claims Tumbled

The 15k U.S. initial claims drop to 233k in the BLS survey week followed a 2k downtick to a still-lofty 248k in the week of the July 4th holiday from 250k at the month’s start, leaving what is still little of the usual July down-tilt in claims through the auto retooling period. Claims have undershot the 2016 average of 263k in every week of 2017, though claims are oscillating well above the 44-year low of 227k in the President’s Day week. Claims are averaging 241k in July, following similar prior averages of 243k in June, 241k in May, and 243k in April. The 238k BLS survey week reading lies well within the mix of recent survey week readings of 242k in June, 233k in May, and 243k in April.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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