EUR/USD Daily Technical Analysis for July 25, 2017

Eurozone yields moved lower as the dollar gain traction with 10-year Bund yields falling below 0.50% and Eurozone spreads narrowing after weaker than expected PMI readings underpinned Draghi’s reluctance to commit to QE tapering just yet. The renewed dip in long yields is weighing on the currency pair, but comments from Mersch  Monday confirmed that postponed, is not canceled with regard to QE and we will likely see the  ECB reducing asset purchase volumes again with the new program, that is expected to start early next year.

Technicals

The currency pair rallied to a fresh 23-month high at 1.1694, and then slid during the balance of the trading session, to close down on the day. Support is seen near the 10-day moving average at1.1523.  Resistance is seen near the August 2015 highs at 1.1717.  Momentum remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to a higher exchange rate.

Bundesbank Sees Strong Q2 Growth

The Bundesbank said in its latest monthly report that the “German economy probably continued to expand with robust momentum in the second quarter of 2017”, adding that “driven by lively demand for German products globally, strong manufacturing is turning more and more into a main engine of economic growth”. At the same time consumer sentiment, favorable labor market conditions and a pickup in retail sales suggest private spending will continue to expand. So, the initially consumption driven recovery is turning more into the usual German growth pattern of strong exports and manufacturing, something that will add to the critics of Germany’s large trade and current account surplus.

Eurozone Composite PMI Dropped in July

Eurozone composite PMI dropped to 55.8 from 56.3, more than anticipated as the services reading falls back to 56.8 from 57.4 and the manufacturing number remained steady at 55.4. Markit highlighted that the Eurozone growth spurt lost momentum once again, after already falling last month. The Composite Output Index is at 6 months low and while data still suggests that the economy started the third quarter on a solid footing the pace of the expansion is slowing down, which will back Draghi’s reluctance to commit to QE tapering just yet. Still, growth of new orders, backlogs of work and employment all remained solid according to Markit and especially ongoing strength in job creation is encouraging as it suggests companies remain optimistic about the outlook.

French and German PMI moved Lower

The French manufacturing PMI may have managed to move up to 55.4 from 54.8, but the services reading fell back to 55.9 from 56.9, leaving the composite at 55.7, below Bloomberg consensus and down from 56.6 in the previous month. The German numbers look even worse, with the manufacturing reading down at 58.3 from 59.6 and the services falling back to 53.5 from 54.0.

ECB’s Mersch said that Eurozone is seeing a broad-based resilient recovery. Mersch said the “various so-called unconventional monetary measures undertaking by the ECB and other central banks throughout the crisis are a good example of adapting policy to changes in the real economy”. He added, however, that while such policies were seen as appropriate, “being both necessary and proportionate responses by central banks to fulfill their mandate for price stability”, “as conditions normalize it is unlikely that these policies will remain necessary”.

ECB likely to make decision on QE in October

There will be too little data will be available at the time of the September 7 meeting and officials are also reluctant to make the long awaited announcement so close to the German general election. December meanwhile, which has been flagged by ECB staff reportedly, is judged at least by some as too late to announce a follow up asset purchase program to the current schedule, which runs until the end of the year. This leaves the meeting on October 26 as a more viable option. By then the ECB will have the updated staff projections from September, but also more wage data, which comes out after the September meeting. The ECB has tended to make decisions at meetings with updated staff projections and while October clearly will be the preferred option for those itching to clarify the situation, there still is the possibility that the ECB will wait until December if uncertainty remains too high at the time of the October meeting. That September is less likely was already suggested by Draghi’s insistence that autumn doesn’t necessarily mean September, and that so far staff hasn’t been tasked with working out the details of a new program.