EUR/USD Daily Technical Analysis for May 22, 2017

The EUR/USD broke out on Friday as European yields moved higher relative to their U.S. treasury counterparts.  As riskier assets gained traction, yields backed up but comments on Friday from the ECB’s Vasiliauskas, and stronger than expected wholesale price data, helped push the Euro to 2017 highs.

Technicals

The EUR/USD broke out to fresh 2017 highs, pushing above the 1.118 level and nearly hitting the 1.12 region.  The next level of target resistance for the currency pair is seen near the November 8, highs at 1.1299.  Support on the exchange rate is seen near the 10-day moving average ta 1.10.  The exchange rate has broken out above a long term trend line that connects the highs in August of 2016 to the highs in November of 2016 and comes in near 1.1120, which is short term resistance above the 10-day moving average.  The weekly close above this level is an important milestone for the EUR/USD, and if there is consolidation above this level, the exchange rate should eventually move higher.

Momentum 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 points to a higher exchange rate.  The RSI (relative strength index) moved higher with price action, but is printing a reading of 71, above the overbought trigger level of 70 and could foreshadow a correction.

Vasiliauskas is Hawkish

The ECB’s Vasiliauskas suggests the central bank should move to tightening bias in June. More comments from ECB officials suggesting that there are differing views on how quickly the ECB should start to signal tapering and exit steps. Vasiliauskas said the ECB should change in forward guidance to show that it is more likely to tighten than ease monetary policy. So, a move to a tightening bias, rather than just a neutral stance. Some Executive board members like Praet have urged caution with regard to changes in communication while Coueure warned against too much gradualism. Vasiliauskas seems to be in Coeure’s camp and the final decision could well hinge not so much on economic data, but on the move back to normalization.

German Producer Prices Were Robust

German Producer price inflation rose to 3.4% year over year in April from 3.1% year over year in the previous month. Energy price inflation ticked up slightly, but the main culprits were manufacturing goods as well as food prices, which jumped 4.9% year over year in April, up from 4.0% year over year in March and compared to just 2.0% year over year in November last year. A late cold spell hit crops earlier in the year hitting especially fresh food prices, which has now rebounded.

EU Current account Narrowed

Eurozone current account surplus narrows in March. The Eurozone posted a seasonally adjusted current account surplus of EUR 34.1 billion in March, down from EUR 37.8 billion in the previous month. This brought the total for the first quarter to EUR 98 billion, up from EUR 73 billion in the fourth quarter last year, even though the trade surplus narrowed. The services surplus by contrast widened sharply. Unadjusted data show direct investment inflows of EUR 42.9 billion in March, and a total of EUR 136.8 billion in the 12 months to March this year, while portfolio investment inflows widened EUR 507.0 billion in this period from EUR 409.2 billion in the 12 months to March last year.

U.S. Political Unrest Remains in Place

Political unrest is continuing in the U.S. as former National Security Advisor, Michael Flynn will not honor the Senate subpoena according to a top Republican on the Senate Intelligence Panel, citing the former security chief’s lawyers in an AP report. Flynn is at the center of the Russian/election controversy, after being fired for lying to VP Pence about contact with Russians ahead of the election.

The Fed Could Hike in June

Cleveland Fed hawk Mester expects further Fed hikes will be necessary if the economy evolves as expected, while delaying hikes too long would risk a recession. She’s also comfortable with altering the Fed’s balance sheet policy later this year and once that plan is decided the Fed should stick to it and use rates to respond to the economy.