The EUR/USD continue to trade on the defensive as softer inflation was confirmed in the Eurozone. German Q4 GDP was confirmed as expected and the Fed’s Monetary Policy report did not offer anything new.
EUR/USD traded on either side of 1.2300 through the session, though has printed its fifth consecutive lower daily high, and has remained under its 20-day moving average since Tuesday. Support comes in at 1.2208, the February 9 low, then at 1.2180, representing the 50-day moving average. Resistance is seen near the 10-day moving average at 1.2365. Momentum remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to lower prices.
Eurozone January HICP inflation was confirmed
Eurozone January HICP inflation was confirmed at 1.3% year over year, in line with the preliminary number and down from 1.4% year over year in the previous month. The core index nudged higher to 1.0% year over year from 0.9% year over year in December. Energy price inflation actually declined, as did food price inflation. Services price inflation remained steady at 1.2% year over year, while prices for non-energy industrial goods nudged higher to 0.6% year over year from 0.5% year over year. The headline rate remains far below the ECB’s upper limit for price stability, but even central bank officials are now admitting that there are signs that underlying inflation is starting to pick up as surveys show that companies are running into capacity constraints and selling prices are rising amid still robust demand.
German Q4 GDP was confirmed
German Q4 GDP was confirmed at 0.6% quarter over quarter, as expected. The working day adjusted annual rate reached 2.9% year over year. The breakdown, released for the first time, confirmed a turnaround in the sources of growth, in the second half of last year, with consumption growth stagnating and net exports taking over as the main driver of growth in what looks almost like a reversal of Germany’s usual growth trends. Gross fixed investment also stagnated at the end of the year, despite a rise of 0.7% quarter over quarter in equipment investment. All in all a still robust number but with the weakness in consumption and investment clearly a concern. Both should pick up as companies run into capacity constraints, the labor market is looking robust and wages set to pick up, but the lingering political vacuum clearly is also weighing on consumer sentiment.
Fed’s MPR didn’t offer anything new
Fed’s MPR didn’t offer anything new in its executive summary, and reads much like the FOMC minutes. Indeed, it repeated the phrase the “FOMC expects that, with further gradual adjustments in the stance of monetary policy.” The report said activity increased at a solid pace over 2H 2017 and that the labor market continued to strengthen, what’s become a boilerplate statement. It also reiterated 12-month inflation has remained below target. And it added that despite the tight labor market, wage growth has been moderate, in part held down by low productivity growth. The Fed also indicated that “resource slack and commodity prices, as well as, for the U.S., movements in the U.S. dollar, appear to explain inflation’s behavior fairly well.” However, it also added, “our understanding is imperfect.” There’s nothing in the report to suggest the FOMC will stray from its gradualist normalization approach for now, leaving a March rate hike on tap, and more tightening down the road. This report will be the basis for Chairman Powell’s congressional testimony Tuesday.
There are several risks were noted in the report. While the Fed said there’s little evidence of emerging supply constraints, it admitted that a serious labor shortage would probably push up wages. The Fed did say valuation pressures edged up from already elevated levels over 2H 2017, and are higher than would be expected based solely on long term Treasury yields, but believe it’s a function of rising expectations on earnings from tax reform. Commercial real estate valuations were especially noted. But the Fed also said vulnerabilities from financial sector leverage appear low, reflecting in part capital and liquidity rations that have continued to improve. There are signs of rising leverage in nonbank financials, with increased margin credit to equity hedge funds and REITs. But, banks are well capitalized and are expected to be able to absorb consequent losses on securities were to unexpectedly increase. Not surprisingly, the Fed seems confident in the system currently, and in its position to deal with possible shocks.
This article was originally posted on FX Empire
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