EUR/USD Daily Technical Analysis for September 26, 2017

The EUR/USD dropped on Monday as the German election results weighed on the currency pair. The unexpected weaker than expected German IFO showed that confidence is declining, which also was a negative for the currency pair. Rhetoric between the U.S. and North Korea buoyed safe haven assets such as the dollar helping to put downward pressure on the EUR/USD.

Technicals

The EUR/USD dropped Monday following this weekend’s elections, pushing the EUR/USD toward support near the 50-day moving average at 1.1826.  A break of this level would lead to a test of the August lows at 1.1661.  Resistance on the currency pair is seen near the 10-day moving average at 1.1928. Negative momentum is accelerating as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to a lower exchange rate.

German Election Results Weigh on the Euro

Preliminary official results for Germany’s new parliament give Merkel’s CDU/CSU 246 of 709 votes, the SPD is trailing far behind with just 153 votes. In theory that would make a renewal of the grand coalition possible, but the SPD has already declared that it doesn’t want to be Merkel’s junior partner yet again. Merkel’s alternative is a coalition with old ally the liberal FDP (80 seats), and the Green Party (67 seats) – the so called Jamaica flag coalition (CDU/CSU – black, FDP – yellow, Green Party – green). A possibility that has been widely flagged ahead of the election, but that will bring its own problems and likely require lengthy coalition talks, especially as Merkel’s CDU is reliant on its Bavarian sister party CSU, which is desperate to win back the voters on the right, which defected in large numbers to the AfD.

German Ifo Unexpectedly Dropped

German Ifo business confidence unexpectedly fell back to 115.2 from 115.9, against expectations for another improvement after the surprisingly strong PMI readings. The forward-looking expectations reading eased to 107.4 and the current conditions indicator dropped to 123.6 from 124.7. Still very high readings, consistent with ongoing robust growth in Germany and the Eurozone. The Ifo rose to 115.7 in Q3 from 114.3 in the previous quarter, which squares with Markit’s assessment that PMI readings point to an acceleration in overall Eurozone GDP growth to 0.7% quarter over quarter in Q3. Still, the numbers highlight again what has been apparent for some months, that PMI and Ifo are out of synch when it comes to short term trends.

ECB’s Vasilauskas wants “concrete date” for end of QE.

The governing council member is quoted by MNI as saying that “all options are on the table”, adding that he would favour of a decision on October and prefers to have “a concrete date or complete term as to how long we can be ” in the bond buying program. Vasilauskas added that there is agreement that the parameters of QE are not under discussion and that “capital key is a key element”. At the same time he seemed to play down the strength of the EUR, saying that he is “not so very worried about the current exchange rate”, which in his view is a sign of the improving economic situation in the Eurozone.

ECB’s Mersch said that Central Bank will “prudently” adjust tool box, when warranted.

The Executive Board member said that “once we have seen a sufficiently sustained adjustment in the path of inflation, we will continue to prudently adjust our tool-box of monetary policy instruments, as we have been doing since December last year”. Back in December 2016 the ECB announced that monthly asset purchases would be scaled back this year, but while back then Draghi was very eager to stress that this didn’t amount to real “tapering” as it wasn’t part of a program to phase out QE, it seems Mersch is now saying that this was indeed the first step on the path to policy normalization. Still, the comments don’t really clarify the path ahead.

Moody’s downgraded its UK sovereign rating by one notch to Aa2, from Aa1. The agency said that the government “has yielded to pressure and raised spending,” and that revenues were unlikely to compensate. Moody’s said that leaving the EU is generating uncertainty at a time when government debt reduction plans were already off course, and that “any free trade agreement will likely take years to negotiate, prolonging the current uncertainty for business.” Moody’s said that the government’s failure to win a majority at the election in May “further obscures the future direction of economic policy,” and that Brexit will dominate legislative priorities, which will limit the government’s capacity to address “substantial” challenges.