EUR/USD Daily Technical Analysis for October 23, 2017

The EUR/USD moved lower reversing course mid-day. Prices were initially buoyed by a stronger than expected German PPI report, and a widening current account. The ECB’s Nowatny sees a gradual exit from QE, which also should help buoy the Euro.  U.S. yields moved higher, helping the dollar gain traction in the wake of the U.S. budget passage in the Senate.

Technicals

The EUR/USD generated an outside day which is a higher high a lower low and a lower close. Prices fell through short term support which is now seen as resistance near the 10-day moving average at 1.1805. Additional support is seen near the October low at 1.1669.  Resistance is seen near the October highs at 1.1880.  Momentum is neutral as the MACD (moving average convergence divergence) histogram prints in the black with a flat trajectory which points to consolidation.

ECB’s Nowotny sees gradual exit from QE.

The Austrian central bank head said “it would be dangerous to make and abrupt full stop” in asset purchases, while adding that in his view the “ECB will take the foot of the gas pedal slowly”. Further confirmation that the central bank will reduce monthly asset purchases with the next QE program, but no indication on the size of the planned reduction of the length of the new program.

The Eurozone Current Account Surplus Widened

The Eurozone current account surplus widened to EUR 33.3 billion, from EUR 31.5 billion in the previous month. The trade surplus widened, which counterbalanced a slightly lower surplus in the services balance. Unadjusted data show an accumulated surplus of EUR 341.5 billion in the 12 months to August, down from EUR 364.1 billion in the 12 months to August last year. The financial account meanwhile showed direct and portfolio investment worth EUR 86.7 billion in August, adding to the accumulated inflows of EUR 345.7 billion in the 12 months to August, a further improvement compared to the EUR 331.3 billion in the 12 months to August 2016.

German PPI Surged Higher in September

German PPI inflation jumped to 3.1% year over year in September, with higher energy prices the main driving factor for the acceleration from 2.6% year over year in August. Prices for oil products rose 7.5% year over year in September, after just 3.0% year over year in the previous month, and electricity prices jumped 8.9% year over year versus 1.6% year over year in August. More signs that at least in Germany inflation is heating up and wage demands suggest that the tight labor market will leave its mark and this week’s wage round.

Decision Time for Draghi

Decision time for Draghi and Co. on the future of QE is quickly approaching. Less-for-longer is what markets are positioning for after recent source stories, and indeed it seem most likely now that there will be another 9 months program, but with purchase levels of just EUR 20-30 billion, which could open the door to a final end to new purchases in September 2018. We don’t expect the central bank to commit to that just yet and the reduction will likely be packaged in a dovish statement that highlights ongoing stimulus and plays down the impact of the reduction in net purchases

The UK Budget Deficit Narrowed

The UK budget deficit narrowed in September to its lowest level in 10 years for this stage of the fiscal year. The pubic sector net borrowing requirement, ex lending to financial institutions, came in at GBP 5.9 billion, below the median forecast for GBP 6.5 billion. The caps what has been an encouraging trend in declining deficits, which should given Chancellor Hammond some leeway at its mid-fiscal year budget update next month.

Fed Fund Futures are Lower

Fed funds futures are lower as safe haven flows unwind as risk appetite jumps. Uncertainty over the Fed chair decision is also leaving the market cautious. The market continues to suggest little likelihood for action at the October 31, November 1 FOMC meeting, but a December hike is pretty much a done deal with implieds suggesting some 85% probability. Two tightenings are expected in 2018, with about a 25% risk for a third, as was forecast by the Fed’s dot plot. That might depend on the composition of the FOMC, and the Fed chair, where it’s a horse race between current chair Yellen, Governor Powell, Taylor, or Warsh, with Cohn now trailing by several furlongs. Of course Yellen or Powell would be the continuity choice, while Taylor or Warsh would be likely to shake up the Fed. The futures are expected to remain jumpy and biased to the low side ahead of the decision and President Trump has said he plans to make the nomination before he departs on his Asian trip in early November.