The EUR/USD bounced from session lows following the FOMC minutes which showed that many Fed officials were concerned about the decline in inflation accelerating. A stronger than expected EU PMI and Retail Sales also helped buoy the currency pair. The ECB Praet urged caution and patience, and not moving quickly to change monetary policy.
Technicals
The EUR/USD bounced near support at the 10-day moving average at 1.1318. Resistance is seen near the June highs at 1.1444. Momentum on the currency pair is neutral as the MACD (moving average convergence divergence) index prints near the zero index level. The MACD histogram has a flat trajectory which points to consolidation.
Eurozone Services PMI was Revised Higher
Eurozone services PMI revised up to 55.4 with the final reading for June from 54.7 in the preliminary estimate, but still down from 56.3 in May. This saw the composite PMI revised up to 56.3 from 55.7 and versus 56.8 in May. Despite the drop in June, Markit reported that the Eurozone economy enjoyed its best quarter for just over six years in Q1 and while output growth slowed slightly in June, “continued robust inflows of new work and elevated business confidence kept the pace of job creation among the best seen over the past decade”. The average reading over the second quarter was the best since Q1 2011.
The ECB’s Praet Urges Caution and Patience.
The Executive Board member said “inflation convergence needs more time to show through convincingly in the data”. “And we need to be persistent, because the baseline scenario for future inflation remains crucially contingent on the very easy financing conditions, which to a large extend, depend on the current accommodative monetary policy stance”. No sign then that Praet is changing his tune and indeed, Praet stressed that the ECB’s “mission is not yet accomplished”.
EU Retail Sales Rose in May
Eurozone retail sales rose 0.4% month over month in May, leaving the annual rate unchanged at 2.6% year over year. Robust numbers, that together with strong survey data confirm that economic growth remains strong and that consumption and domestic demand continue to underpin the recovery. With the ECB focused on inflation and in particular wage growth, however, this doesn’t change the central bank outlook as officials continue to see the need for ongoing monetary support.
The FOMC Showed Concerns over Current Inflation
FOMC minutes showed most officials said “idiosyncratic factors” were responsible for the softer trend in inflation, though several were concerned that the progress on inflation may have slowed. A couple of policymakers, however, saw rising inflation risk from the “undershooting of the jobless rate.” They also noted some financial market conditions had eased even as policy accommodation was being reduced. Committee members were divided over when to begin the balance sheet unwind, expressing a range of views. There were no clear insights in the minutes to better assess the timing of the balance sheet unwind. But, given the Committee decided to announce the balance sheet details at this meeting suggests the start could begin, as Yellen said, “sooner.” The Fed continues to believe a well telegraphed, and gradual approach to shrinking the balance sheet will limit market reaction. The Fed is also expected to delay rate hikes when it initiates the shrinkage of the portfolio, and that will give the data time to improve and hence support views that it’s idiosyncratic factors weighing. The minutes didn’t materially add to the markets’ body of knowledge on the normalization path.