EUR/USD Daily Technical Analysis for July 5, 2017

The EUR/USD continued to decline as U.S. yields gained traction following Monday’s stronger than expected ISM Manufacturing report.  The U.S. was closed Tuesday for the Independence Day holiday, but there are a number of catalysts that will drive the currency pair during the balance of the week including Friday’s U.S. Payroll report.

The EUR/USD edged lower and is poised to test support near the 10-day moving average at 1.1299.  The exchange rate has eased from the 1.14 handle which was a 1-year highs and is hovering near the August 2016 highs at 1.1350.  Resistance is seen near the 1.1444 level.  Momentum is neutral as the MACD (moving average convergence divergence) index prints in the black with a flat trajectory which reflects consolidation.

Italy Wins Approval for Rescue Plan

Italy’s Monte Paschi wins EU approval of rescue plan. The European Commission formally approved a EUR 5.4 billion capital injection, “on the basis of an effective restructuring plan”. The bank failed to raise extra capital from investors back in December and the government’s precautionary recapitalisation of the lender, which has been declared solvent by banking supervisors highlights that the link between bank and government debt hasn’t been totally severed yet, even under the new rules. Still, Monte Paschi’s shareholders and junior creditors have also contributed EUR 4.3 billion under regulations for “burden sharing”. And Italy’s finance minister hopes that with the troubled Veneto banks sold and Monte Paschi hopefully on the way to a revival the troubled Italian banking sector will start to calm down. Italy’s MIB is outperforming other European markets and up 0.26 on the day.

Eurozone PPI Contracted

Eurozone producer price inflation fell back to 3.3% year over year in May from 4.3% year over year in the previous month. The deceleration was mainly due to base effects and not unexpected after national data, but it will help the arguments of the doves at the ECB, who remain cautious about moving too quickly towards tapering steps. Still, while the doves can point to the marked decline in the number, the hawks will stress that the headline rate remains quite high.

Swedish Riksbank Leaves Repo Rate Unchanged, Scales Back Easing Bias.

The Riksbank left the repo rate steady at -0.50% as widely expected, but tweaked the guidance by saying that it is now less likely to cut the repo rate than previously. The rate path now envisages rates remaining at their current level until mid 2018, rather than indicating the potential for further cuts through the end of the year. The bank said “the fact that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased makes it less likely than before that the Riksbank will cut the repo rate in the near time”. However, like the ECB the Riksbank has not fully removed the possibility of further easing, saying that “this does not rule out repo rate cuts in the period ahead”.

UK Construction PMI Missed Expectations

The UK June construction PMI missed expectations, ebbing to 54.8 in the headline reading of the survey from 56.0 in May. The median forecast had been for a 55.0 reading. The details highlighted softening in new orders and employment, while business optimism in the sector declined to its weakest reading for 2017 so far. Survey respondents reported a rise in risk aversion among clients, according to Markit, the compiler the survey, which may not be surprising given the unexpected election outcome on June 8. At 54.8, the indicator is still the second highest since December 2015, and shows a sector that is continuing to expand robustly. Nonetheless, deceleration will have investors on edge given the fragility of the minority government and the risk that this backdrop poses to just-commencing Brexit negotiations. Tomorrow’s release of the services PMI will be more keenly watched for signs of how the broader economy is performing, and possible implications for BoE policy.

There is Division at the BoE’s MPC

There is division at the BoE’s Monetary Policy Committee, with member McCafferty having advocated a rate hike while Vlieghe argued that hiking too soon would be worse than hiking too late. McCafferty, who was one of the three (out of eight) MPC members who voted to hike the repo rate by 25 basis points in June, said that “the economy has not slowed to the extent we feared” in the wake of the Brexit vote last June, and with inflation having been high “there is a need for change” and reverse the 25 basis points rate cut of last August. This would take the repo back to 0.50% from the present historic low of 0.25%. Vlieghe, meanwhile, argued that the “consumption slowdown is here, it’s not over” that that he doesn’t think there’s going to be “sufficient offset from investment and net exports to compensate.”