EUR/USD Daily Technical Analysis for September 19, 2017

The EUR/USD was nearly unchanged hovering just below the 10-day moving average at 1.1953.  While inflation was confirmed as 1.5% below the ECB’s target of 2%, traders are focused on the Federal Reserve meeting which is schedule for the 19^th and 20^th of September. While nothing is expected at this meeting, there is the chance that the Fed discusses how they handle the bond purchase program.  Separately, the Bundesbank believes that growth will slow in the H2.

Technicals

The EUR/USD consolidated ahead of the Fed meeting which begins tomorrow.  Support is seen near last week’s lows at 1.1834, while resistance is seen near last week’s highs at 1.2092. Momentum  on the currency pair remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to a lower exchange rate.

Eurozone August Inflation Was Higher in August

Eurozone August HICP inflation was confirmed at 1.5% year over year, up from 1.3% year over year in the previous month and in line with the preliminary number. Core inflation was confirmed at 1.2% year over year, unchanged from July. Energy price inflation accelerated to 4.0% year over year from 2.2% year over year and was a key driver behind the uptick in the headline rate in August, which backs the arguments of the doves at the ECB that further monetary stimulus remains necessary, as the ECB heads for yet another QE extension.

Portuguese Bonds were Raise to Investment Grade

Portuguese bonds rally after S&P raises rating to investment grade. S&P lifted Portugal’s rating to BBB- from BB+, ending the junk rating that had been in place since 2012. The Portuguese 10-year yield is down -25.4 basis points at 2.50% the lowest in more than 2 years.

Bundesbank Sees Slower Growth

Bundesbank sees slowdown in growth in the third quarter. According to the Bundesbank’s latest monthly report German growth is likely to be slightly lower in the third quarter, compared to the strong dynamic seen in the first half of the year. At the same time, the Bundesbank stressed that the strong currency hardly left its mark on producer price inflation. The Bundesbank President Weidmann continues to call for an end to the central bank’s asset purchase program.

UK House Prices Where Weaker than Expected

In the UK, the September Rightmove house price index came in weak, and a Markit survey found the squeeze on household incomes is the biggest in three years. The Brexit process hasn’t been going smoothly, and there are fresh signs of division in PM May’s Conservative Party after Boris Johnson was rebuked by the head of the head of the UK official states office for rehashing false figures about Brexit savings.

The Fed Will Focus on October

As for the balance sheet unwind, the Fed is expected to announce it will commence in October. Back at the June 13, 14 meeting the FOMC provided details on their portfolio plans for policy normalization via reductions in reinvestment of principal payments that adhere to gradually rising monthly caps. For Treasuries, the FOMC expects an initial $6 billion monthly cap that rises by steps of $6 billion every three months until it reaches a $30 billion monthly cap within 12 months. For agency debt and mortgage-backed securities, the FOMC expects an initial $4 billion monthly cap that rises by steps of $4 billion every three months until it reaches a $20 billion monthly cap within 12 months. The cap will then remain in place until the portfolio shrinks to the size necessary to implement monetary policy efficiently and effectively, though the FOMC may settle on a larger portfolio than held before the financial crisis. The FOMC also cautioned that it may resume reinvestment if the economic outlook deteriorates, and the Fed funds rate target proves to be an inadequate policy tool.

Central Banks Take Center Stage

Central banks and geopolitical risks continue to take center stage. Comments from ECB speakers this week, including Draghi, as well as the ECB’s latest economic bulletin, are likely to confirm that the central bank is heading for another QE extension but with reduced monthly purchase volumes. A Reuters poll showed that consensus expectations are now for the ECB to announce a EUR 20 billion reduction in monthly asset purchase targets in a six-month QE extension, which would take us through the end of June 2018, and would add another EUR 240 billion to the ever-expanding stock of asset holdings.