FUNDAMENTAL ANALYSIS FOR 30-May-2018

The EUR/USD tumbled dropping down to 8-month lows, as Italian yields surged putting downward pressure on the currency pair.  Prices appears to have held support near the November lows.  The ECB sat on the sidelines and watch as the ECBs Visco failed to calm investors nerves.  European money supply accelerated which could foreshadow inflation.

Technicals

The EUR/USD tumbled but held the November lows after pushing down to support at 1.1509.  A break of this level would lead to a test of the June 2017 lows at 1.1119.  Resistance is seen near the 10-day moving average at 1.1717. Momentum is negatives as the MACD (moving average convergence divergence) histogram prints in the red with a downward sloping trajectory which points to a lower exchange rate. The exchange rate is oversold as the fast stochastic is printing a reading of 3, well below the oversold trigger level of 20.

ECB watches on the sidelines as Italy rocks Eurozone markets

ECB watches on the sidelines as Italy rocks Eurozone markets. Eurozone breakup fears seem to be fueling the selloff in Eurozone bond markets and the sharp widening of spreads, but so far at least the ECB does not seem interested in trying to calm verves. Italian central bank head Visco instead warned in a Spiegel interview that Italy is always just a few steps away from the “very serious risk of losing the irreplaceable asset of trust”. Visco added that “it would not be wised to ignore financial compatibility” of planned policy moves and warned that “Italy knows the rules. They might want to read them again carefully”. A clear signal then that the ECB is not ready to step in and in that respect the widening of spreads versus the German benchmark that we are seeing now is a readjustment of the risk aspect of bond prices.

ECBs Visco fails to calm investor nerves

ECBs Visco fails to calm investor nerves. Comments from the Italian central bank head, who bemoaned “lazy short-termism” and stressed that Italy is always a “few steps away” from losing the trust of markets exacerbated the moves. Draghi promise to do “all it takes” to keep Eurozone markets stable, does not seem to apply to politically induced troubles. ECBs Constancio reportedly said in a Spiegel interview that “we will see what happens” in Italy. No sign so far then that ECB officials are ready to step in.

Eurozone M3 money supply growth accelerated

Eurozone M3 money supply growth accelerated to 3.9% year over year from 3.7% year over year in the previous month. The uptick was in line with expectations, but the focus as usual was on the counterparts and in particular loans to the private sector. The growth rate of loans to households held steady at 3.0% year over year, as an acceleration in consumer credit growth counterbalanced a slight deceleration in the growth rate of loans for house purchases. More importantly for the investment and growth outlook was the fact that loans to non-financial corporations rose 2.4% year over year, up from 2.2% year over year.

St. Louis Fed dove Bullard said it is hard to raise rates

St. Louis Fed dove Bullard said it is hard to raise rates by a large margin and get too far out of line with the global situation if the BoJ and ECB are pursuing accommodating policy. Speaking earlier from Tokyo, Bullard also said the Fed has enough tools and policy options to respond the next time the U.S. falls into recession. He did not want to prejudge what the Fed will do at its next meeting in June, but it is his view that the Fed should not proceed with additional rate hikes unless economic data surprise to the upside. Bullard still regards inflation as a bit low and because the U.S. policy setting is possibly at neutral means the Fed should be cautious.

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