EUR/USD Daily Technical Analysis for July 26, 2017

Eurozone yields jumped higher with European equity markets in the wake of record beating German Ifo confidence readings. The headline Ifo may overstate growth prospects, but coupled with comments from ECB’s Mersch, who was more optimistic on both growth and inflation, markets were reminded that tapering is still looming on the horizon. Inflation remains moderate which was reflected in Tuesday softer than expected German import price report. The EUR/USD surged to test support levels as riskier assets gained traction pushing equity markets in the United States to fresh all-time highs. U.S. yields backed up, with the 10-year surging 8-basis points, pushing the yield differential in favor of the greenback, and weighing on the currency pair.

Technicals

The EUR/USD surged to test resistance at a 2-year high near 1.1717, but failed to hold on to gains as yields in the U.S. caught up to the gains seen in European yields following the stronger than expected German IFO report. The exchange rate is still forming a bull flag pattern which is a pause that refreshes higher.  Support is seen near the 10-day moving average at 1.1541. A break of resistance seen near the August 2015 highs at 1.1717, would lead to a test of target resistance near the June 2012 lows at 1.2042.

Momentum on the currency pair is positive as the MACD (moving average convergence divergence) index recently 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 MACD histogram is printing in the black with an upward sloping trajectory which is pointing to higher prices for the EUR/USD. The RSI (relative strength index) edged higher with price action reflecting accelerating positive momentum. The current reading on the RSI is 72, which is above the overbought trigger level of 70 and could foreshadow a correction in the exchange rate.

 

German Import Price Inflation Declined

German import price inflation fell back to 2.5% year over year from 4.1% year over year in the previous month, with prices down -1.1% month over month. Base effects from oil prices and currency moves are largely behind the drop in the headline rate and at 2.5% year over year import price inflation remains at elevated levels. Still, weaker than expected data, which together with the expected stable HICP reading for July this week will add to the arguments of Draghi, who is only very slowly inching towards tapering, although Mersch’s comments highlight again that postponed is not canceled.

German IFO Unexpectedly Rose in July

German July Ifo index unexpectedly jumped to 116.0 from 115.2. Expectations had been for a slight correction in the headline reading, especially after Monday’s disappointing PMI readings, but the Ifo reading hit an all-time high, sending yields higher. Still, the breakdown showed that the overall improvement was entirely due to a sharp rise in the current conditions indicator, while the more forward-looking expectations index stagnated. So, the message is not unlike that of the PMIs, which showed ongoing robust growth, but a slowdown in the pace of expansion.

French Manufacturing Confidence Was Steady in July

French manufacturing confidence remained steady at 109 in July, with June data revised up to 109 from 108 reported initially. Overall business confidence improved to 108 from 107, with the latter revised up from 106. The reading for the own company production outlook dipped, however, to 10 from 13, so like the PMI readings yesterday some mixed messages from confidence indicators, although all in all data still points to an ongoing recovery and a robust start to the third quarter of the year.

SNB’s Jordan said The CHF is Still Significantly Overvalued.

The central bank head said in an interview with Le Temp, conducted last week and published late Monday, that this means the SNB is sticking with its policy of low interest rates and intervention on forex markets if needed. Jordan added that inflation remains low with production capacity not fully exhausted. He stressed that the central bank still has enough room to man oeuvre to expand the balance sheet if necessary.