EUR/USD Daily Technical Analysis for July 31, 2017

European yields jumped higher after Eurozone data revives taper fears, which helped buoy the EUR/USD. Higher than anticipated inflation data out of Spain and German states coupled with a surprise uptick in ESI sentiment revived tapering concerns and saw bond futures heading south in tandem with stock markets. Spanish GDP increased more than expected, while the U.S. ECI accelerated, along with Q2 GDP.

Technicals

The EUR/USD exchange rate moved higher testing resistance near Thursday’s higher but was unable to eclipse the 1.1777 level. Support on the currency pair is seen near the 10-day moving average at 1.1628.  Momentum on the exchange rate is neutral as the MACD (moving average convergence divergence) histogram prints in the black with a flat trajectory that reflects consolidation. The currency pair is overbought. The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, as well as overbought and oversold conditions, is printing a reading of 72, which is above the overbought trigger level of 70, which could foreshadow a correction.

Spanish Growth Accelerated

Spanish Q2 GDP accelerated to 0.9% quarter over quarter from 0.8% quarter over quarter in the previous quarter. A slightly better result than expected, and confirming that the Spanish reform efforts are taking effect, with growth continuing to top the Eurozone average. Unemployment is also improving, but remains far too high especially among those under 25 highlighting the need for more structural reforms.

Eurozone Economic Confidence Improved in July

Eurozone ESI economic confidence unexpectedly improved to 111.2 in July from 111.1 in the previous month. Industrial sentiment remained steady at 4.5 and services confidence improved to 14.1 from 13.3, while consumer confidence was confirmed at -1.7, down from June. All in all a better than anticipated reading that shows the impact of the surge in German confidence. Taking stock of July’s full round of confidence indicators, the number confirms that the Eurozone recovery remains on track on robust, but also shows some signs that things are stalling at high levels, rather than accelerating further.

Inflation Perked Up

German state data points to upside surprise in July HICP. Two of the heavyweights among the German states, Bavaria and NRW reported an unexpected uptick in the annual rate of 0.2% points, while headline rates were broadly steady in the other states. The data points to an upside surprise in the German HICP rate, which was expected to remain steady at 1.5% year over year, but could nudge higher to 1.6% year over year.

French, Spanish inflation numbers steady in July. French HICP remained steady at just 0.8% year over year in July, unchanged from June, while the Spanish HICP rate unexpectedly accelerated to 1.7% year over year from 1.6% year over year in June. The first German state inflation number from Saxony meanwhile also showed an unchanged annual rate at the start of Q3. So, the forecast for a steady German number remains intact, leaving the overall Eurozone HICP reading, out next week, on course to come in unchanged from June and at 1.3% year over year still far below the ECB’s upper limit for price stability of 2%.

The Q2 Employment Cost Index Rose

U.S. Q2 ECI rose 0.5% after the 0.8% gain in Q1. Wages and salaries were up 0.5% from 0.8%. Benefits were up 0.6% versus 0.7% previously. Private compensation slowed to 0.5% last quarter versus Q1’s 0.8%, with wages and salaries up 0.5% from 0.9% and benefits up 0.6%, the same as Q1. Compensation in the government sector rose 0.5% following the 0.6% in Q1, with wages 0.4% higher following the 0.6% gain and benefits up 0.7% from 0.8%. On an annual basis, compensation posted a 2.4% year over year rate of increase, the same as Q1, but a little faster than the 2.2% year over year in Q4.

GDP Was Stronger than Expected

U.S. GDP accelerated to a 2.6% pace in Q2, more than doubling the 1.2% Q1 rate which was revised down from 1.4% and compares to the 1.8% clip in Q4. Personal consumption increased 2.8% from Q1’s 1.9% which was revised up from 1.1%. Fixed investment rose 2.2% following the prior 8.1% Q1 gain, with residential spending falling 6.8% from 11.1% and business spending up 5.2% from 7.2% which was revised from 10.4%. Government consumption edged up 0.7% from -0.6%, with Federal spending at 2.3% from -2.4%, including a 5.2% increase in defense spending from -3.3%. State and local spending dipped 0.2% from 0.5%. Inventories subtracted $1.5 from -$61.9 billion in Q1. Net exports added $7.3 billion after adding $8.9 billion previously. The GDP chain price index, which is used as an inflation gauge, posted a 1.0% increase, halving the 2.0% gain previously, with the core rate at 0.9% from 1.8%.