EUR/USD Daily Technical Analysis for June 28, 2017

The EUR/USD surged higher breaking out following comments from the ECB Draghi which hinted at policy adjustment, but pledges caution. Draghi’s comments seem to be the clearest indication from the central bank head yet, that the ECB is heading for a shift in policy parameters. Like at the last council meeting, Draghi sounded more upbeat on growth and repeated that the deflation risk has abated and that reflationary forces are at play. However, as Draghi highlighted, this “more favorable balance of risks has been already reflected” in the ECB’s adjustment to the forward guidance. Draghi still urged prudence in the adjustment of policy parameters and stressed that changes have to be made “gradually, and only when the improving dynamics that justify them appear sufficiently secure”.

The EUR/USD broke out, hitting a fresh 11-month high following Draghi’s comments which were more hawkish than expected. Bund yields soared, and interest rate futures moved lower. The yield differential moved in favor of the Euro, paving the way for a higher European currency.  The exchange rate soared above last week’s highs, at 1.1296, which is now seen as short-term support. Target resistance is now seen near the August 2016 highs at 1.1365.

Momentum moved higher as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram is now printing in the black with an upward sloping trajectory which points to a higher exchange rate.

The relative strength index (RSI) which is a momentum oscillator that measures accelerating and decelerating momentum, surged higher along with price action reflecting accelerating positive momentum. The current reading on the RSI is printing near the 65 handle, just below the overbought trigger level of 70.

Draghi hedge a little as the central banker repeated that inflation is more muted than one would expect given the growth situation. Factors dampening inflation are overall temporary, and that deflationary forces are replaced by reflationary ones. At the same time, Draghi repeated that a considerable degree of stimulus is still needed and that the ECB must be prudent in adjusting the stimulus.

Italian Confidence Jumps in June

Italian confidence jumps higher in June, with manufacturing confidence rising to 107.3 from 106.9, while consumer confidence jumped to 106.4 from 105.4 in the previous month. The overall Economic Sentiment Indicator nudged to 106.4 from 106.2 and data suggests that the Italian economy continues to catch up, even if structural problems remain and the banking sector continues to struggle.

UK Distributive Sales Beat Expectations

UK June distributive sales survey beat expectations, with the headline, realized sales reading rising to +12 from +2 in May, up from the median forecast for an unchanged outcome. The outlook was less impressive, with sales volumes expected to stall in the year to July, with new orders also anticipated to be flat. The soft outlook is a concern, offsetting the perky headline. The survey follows UK consumer credit data from the BBA showing weakness in May numbers, with consumer lending falling to a growth rate of 5.1% year over year, the slowest rate since October 2015. Higher inflation showed that the CPI was at 2.9% year over year in May, along with political uncertainties, pose a threat to consumer activity.

U.S. Chain Store Sales Increased in the Latest Week

U.S. chain store sales climbed 2.9% in the week ended June 24, following the 2.5% increase in the prior week. This is a third consecutive weekly gain. The annual pace also climbed to a 1.8% year over year clip versus 0.4% year over year, previously, and is the strongest rate in two months. The sales index has more than recovered from the 4.8% plunge in the June 3 week.

German house prices up to 30% overvalued, according to calculations. Bundesbank Vice President Buch told journalists today that house prices in German cities are 15-30% above their fundamental value. Previously the Bundesbank saw an overvaluation of 10-20%, highlighting that the risk of a house price bubble is rising as dynamic price increases are expanding to surrounding areas. Still, the Bundesbank argues that private credit growth is not elevated to an extent that would suggest a credit fueled bubble on the housing market.