EUR/USD Daily Technical Analysis for September 8, 2017

The EUR/USD surged higher following the lack of information from the ECB on the Euro and the expectation that the central bank will deal with quantitative easing in October.  The central bank left interest rates unchanged and cut back its inflation forecast mainly due to the strong Euro. Draghi said that Euro volatility is generating uncertainty, but failed to describe a situation where the currency pair could fall.

Technicals

The EUR/USD tested last week’s highs at 1.2070, falling short by 10 pips, with support on the currency pair near the 10-day moving average at 1.1925. A break of the 1.2070 level would lead to a test of the November 2014 highs at 1.2414.  Momentum has turned positive 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 ECB Left Rates Unchanged

The European Central Bank left rates unchanged, and confirms QE schedule, which currently runs until the end of December. The initial monetary policy statement is pretty much unchanged from June, and repeats that rates are “to remain at present levels for an extended period, and well past the horizon of the net asset purchases”, while QE can still be extended in size and duration if necessary. The focus now turns to the press conference and signs that officials started to at least discuss the outlook for 2018 today, thus preparing for an announcement on the future of asset purchases next year.

The ECB Cuts Its Inflation Forecast

ECB cuts back inflation forecast, mainly due to a stronger than expected EUR. The forecast for this year was left unchanged at 1.5%, but projections for 2018 and 2019 were cut to 1.2% and 1.5% from 1.3% and 1.6% respectively. So even at 2019 the headline rate would remain clearly below the 2% limit. GDP forecasts were left unchanged at 2.2% this year, 1.8% in 2018 and 1.7% in 2019.

The Economic Recovery Depends on Monetary Policy Support

Recovery remains dependent on monetary support. Asked about the discussion on the upcoming decision on the policy calibration for next year, Draghi stressed that there was broad dissatisfaction that inflation hasn’t moved higher and that the recovery still remains reliant on the expansionary monetary policy. He also stressed that while the exchange rate is not part of the ECB’s policy, it is clear that it has to be taken into account, while adding that there was broad consensus that the EUR now requires monitoring with regard to the impact on the inflation outlook. ECB didn’t discuss sequencing of policy steps so the statement still sees rate changes coming after the end of QE and changes in initial issuer limits.

Euro Volatility is a Source of Uncertainty

The ECB sees solid broad-based expansion of economic activity, but stressed that the recent volatility in exchange rate is source of uncertainty and requires monitoring. Inflation is still expected to rise gradually toward the ECB goal, but there are still now firm signs of a sustained rise in inflation. So a substantial degree of monetary policy accommodation remains necessary. Against that background QE can sitll be extended in size and/or duration if necessary. Draghi confirmed that the ECB will decide on the policy calibration for next year in the autumn, without going into detail. With the introductory statement left unchanged, there is not even a tightening bias so far and the fact that the ECB highlights forex developments confirms that the central bank will take a very cautious approach when reducing asset purchases and it seems less and less likely that the ECB will lay out a full schedule for the phasing out of QE this year.

Eurozone GDP Rose

Eurozone Q2 GDP was confirmed at 0.6% quarter over quarter as expected. The full breakdown, which was released for the first time, showed that growth was mainly driven by domestic demand, with household consumption adding 0.3% points to the quarterly growth rate, and investment a further 0.2% points. Exports contributed 0.5% points, while imports detracted -0.4% points, leaving a slightly positive contribution from net exports.

German Production Stalled

German production stagnated in July, against expectations for a rebound from the dip in June of -1.1% month over month. Excluding construction, production declined -0.1% month over month and the three months trend rate slowed to 1.0% in July, from 1.8% in the three months to June. Coming after the weaker than expected orders number yesterday the numbers cast a shadow over the German growth projections for Q2, even if confidence data suggest a rebound with August numbers and the annual rate jumped to 4.0% year over year from 2.7% year over year in the previous month.