EUR/USD Daily Technical Analysis for July 27, 2017

U.S. yields edged slightly higher as stocks in the U.S. hit fresh all-time highs. ECB yields eased after rising on Tuesday, despite broad gains on European stock markets. The Fed said that further changes to the normalization policy were coming soon, when discussing the balance sheet. They also left rates unchanged.  The Fed said that the economy is modest running below 2%. The ECB’s Nowotny implicitly confirmed that tapering is underway, although he argued against committing to a final end date for asset purchases, indicating that the ECB remains committed to caution as it removes accommodation The IMF also urged the ECB to maintain its stimulus amid low underlying inflation and wage growth. Greece took some steps back to normality while Italian sentiment took a step back.

Technicals

The EUR/USD generated a doji day which is a pattern that reflects indecision which makes sense given Wednesday’s Fed decision. While no one expected the Fed to describe QE tightening, any whiff of further normalization might give pause to the rally in stocks.  Higher U.S. yields were pulling the EUR/USD lower, which has been offset by the potential move in quantitative easing by the ECB.  The currency pair is also forming a bull flag pattern which is a pause that refreshes higher.  Support on the EUR/USD is seen near the 10-day moving average at 1.1562.  Resistance is seen near the July highs at 1.1712.  Momentum is neutral as the MACD (moving average convergence divergence) histogram prints in the black, but the trajectory is moving lower which points to consolidation.

Greece makes tentative steps back to normality.

Greece’s 5-year bond sale Tuesday was an important step for the indebted country that is still reliant on bailout funds, but it is hardly the end of its struggles. Greece managed to rise EUR 3 billion with the first bond sale since 2014 and the yield was 4.625%, less than what it paid in 2014, but considering how yields have come down since then elsewhere in the Eurozone that is still a hefty price tag. Furthermore, Greece will have to sell much more to escape the bailout program in August 2018 as it plans to do. The bond sale came after creditors released EUR 8.5 billion in bailout funds in June, the IMF agreed to a new USD 1.8 billion conditional loan for Greece last Thursday and S&P raised the country’s credit rating outlook to positive from stable.

ECB’s Nowotny Affirms Declining Accommodation

ECB’s Nowotny against committing to end date for QE. Nowotny said in an interview that he considers it “wise to step of the gas slowly”, adding that “the U.S. central bank also implemented tapering without committing to a definite timetable”. The QE program currently runs until the end of the year and the ECB is widely expected to reduce monthly purchase targets again with a follow up program, but Nowotny’s comments suggest that the ECB may not yet lay out a full time table for a final end to QE and indeed given Draghi’s very cautious stance so far, it seems more likely that the ECB won’t commit to a fixed data for the end of QE. The IMf also urged the ECB to maintain stimulus as underlying inflation and wage growth remains weak and with inflation expected to ease again next year, Draghi seems to have room for a gradual approach.

UK Q2 GDP Was in Line with Expectations

UK preliminary Q2 GDP came in as expected at 0.3% quarter over quarter and 1.7% year over year, up from Q1’s 0.2% in the case of the quarter over quarter figure and down from Q1’s 2.0% year over year in the case of the year over year figure. The data affirms the pronounced stagnation in the economy that was seen in Q1, following 2016’s average quarterly growth of 0.6%. Relatively high inflation rates, following the sharp drop in sterling since the Brexit vote last June, and consequential erosion in consumer spending power and confidence, have been weighing on UK growth.

Italian Economic Sentiment Eased

Italian economic sentiment fell back to 105.5 from 106.3 in the previous month. Consumer confidence still improved to 106.7, but by contrast French consumer confidence fell back to 104 from 108. After the record beating German Ifo reading yesterday the numbers are a reminder that things may be as good as they get for the Eurozone now and that while the recovery remains intact momentum may be stalling somewhat. More arguments then for Draghi and Co to remain cautious about QE tapering.