|Daily analysis | 24 August 2017
Euro inches up after encouraging PMI’s
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The euro gained further yesterday, particularly versus sterling, following the release of Eurozone’s preliminary manufacturing and services PMI’s for August. Even though the bloc’s services index slipped somewhat, the manufacturing print rose notably, which was enough to push the composite index higher. Despite the slowdown in services, if seen in combination, these prints signal that the bloc’s economy continues to recover at a solid pace, and they are consistent with our view that the ECB is set to announce QE changes soon.
As for Draghi, he did not reveal anything new on policy yesterday. Market focus remains on his Jackson Hole speech tomorrow. The euro could consolidate somewhat until then, given that there is no Eurozone data on the economic calendar, and that traders may be hesitant to assume new positions ahead of such a risk event. If anything, we believe there may be some hedging or liquidation of prior long-EUR positions ahead of his remarks, in case market participants are concerned that he may appear more worried than previously with regards to the latest strength of the euro.
In the UK, the 2nd estimate of GDP for Q2 is expected to confirm the preliminary reading. If we were to see any revision, we think that it could be higher, as the only major indicator for Q2 released after the 1st GDP estimate was industrial production for June, which was stronger than expected. An upside revision could support GBP, but given the continued sell-off in the currency recently, any positive reaction may remain short-lived.
If the GDP print remains unchanged as expected, the market focus may turn to the other key aspect of this data set; business investment. Back in June, BoE Governor Carney noted that a BoE rate hike may depend mainly on whether weaker consumption growth is offset by stronger business investment, and on whether wages begin to firm. Given that wages have shown little-to-no signs of firming in recent months, a pickup in business investment may be needed to keep alive some speculation for a near-term BoE hike. At the time of writing, the probability of a hike by year-end rests at 25%, according to the UK Overnight Index Swaps.
EUR/GBP traded higher yesterday after it hit support near the 0.9150 (S1) level and at the time of writing, it is testing the resistance barrier of 0.9235 (R1). The rate continues to print higher peaks and higher troughs above the short-term uptrend line taken from the low of the 17th of July and as such, we consider the near-term outlook to be positive. A clear break above 0.9235 (R1) could set the stage for more bullish extensions, perhaps towards our next resistance level of 0.9300 (R2). Nevertheless, given that we see upside risks to the UK GDP data coming out today, we are mindful of a corrective setback before the bulls decide to take the reins again. Our short-term oscillators support the case for a pullback as well. The RSI shows signs of topping above the 70 level, while the MACD, although above both its zero and trigger lines, has started topping as well.
Zooming out to longer-term time frames, we see that the overall path of the pair is positive as well. The rate continues to trade above the long-term uptrend line taken from the lows of November 2015, something that increases the likelihood for EUR/GBP to continue trading higher in the foreseeable future.
In Norway, GDP data for Q2 have already been released and showed that the nation’s growth rate rose from the previous quarter, beating the forecast for remaining unchanged. This print is better than what the Norges Bank anticipated in its latest economic forecasts and thus, enhances the case for the Bank to continue shifting to a more hawkish stance at its upcoming meetings, in sync with the ECB.
USD/NOK dipped briefly below the support (now turned into resistance) of 7.8500 (R1) after the upside surprise in Norway’s GDP for Q2. The 7.8500 (R1) barrier acted as the lower bound of the sideways range that had been containing the price action since the 25th of July and as such, we think that the near-term bias may have just turned from neutral to negative. If the 7.7800 (S1).
As for the bigger picture, the break below the psychological zone of 8.000 (R3) on the 25th of July may have signaled a trend reversal on the weekly chart, which supports our view for further declines, at least in the weeks to come.
In the US, the annual Jackson Hole economic symposium will commence (24th – 26th). Even though the program with all of the speakers will only be released later today, both ECB President Mario Draghi and Fed Chair Janet Yellen have already been confirmed to speak on Friday. As for the US data, initial jobless claims for the week ended August the 18th and existing home sales for July are due out as well.