The EUR/USD edged higher consolidating ahead of both the ECB meeting on Thursday and the FOMC earlier in the week. While the Fed is expected to increase interest rates by 25-basis points, the ECB has guided the markets toward the phasing out of quantitative easing. Italian Industrial production unexpectedly dropped.
The EUR/USD edged higher but consolidating ahead of the ECB meeting. Support is seen near the 10-day moving average at 1,1727. Resistance is seen near the 50-day moving average at 1.1987. Momentum remains positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to a higher exchange rate. The fast stochastic surged higher but reflects and overbought condition.
Italian industrial production dropped More than Expected
Italian industrial production dropped -1.2 month over month in April. This is a sharper than expected correction that left the 3 months trend rate at -0.7%, down from -0.3% in the three months to March. The working day adjusted annual rate fell back to 1.9% from 3.5%. More signs then that the Eurozone’s industrial sector failed to bounce back at the start of the second quarter. That doesn’t seem to deter the ECB, however, which remains on course to phase out QE by the end of the year.
The FOMC is one among several key events ahead that could rattle the markets, alongside ongoing trade uncertainties. With a 25 bp tightening baked in, the focus will be on the Fed’s forward guidance, including the dots, as well as any tweaks to the IOER. The Fed will likely maintain the median dot projection of three rate hikes this year, though there’s speculation of a bump up to four. The 2019 outlook to be left unchanged at three tightening as well, underscoring the gradualist mantra.
FOMC Forecast revisions to be released Wednesday
FOMC Forecast revisions to be released Wednesday after the FOMC meeting should reveal increases in the 2018-19 GDP estimates, alongside small upward tweaks in the low-end 2018 PCE chain price estimates, with possible small bumps for 2019, and modest trimmings in the high-end jobless rate estimates across the forecast horizon. For GDP, the Fed’s March estimates incorporated the CBO scoring of the final tax law, though strong economic reports since then and upward revisions in market estimates should feed greater optimism at the Fed as well. GDP growth should be boosted of 0.1%-0.2% through 2018-19, but unchanged estimates for 2020. We also expect 0.1% boosts in the Fed’s low-end 2018 headline and core PCE chain price estimates, with possible lifts in low-end 2019 figures, though many expect 2020 projections to remain the same. The high-end jobless rate estimates could be reduced by 0.1% across the board, given a stronger growth path for payrolls.
The U.S. wholesale report beat estimates
The U.S. wholesale report beat estimates for sales and inventories, thanks partly to price-strength for food and oil, with a stronger performance for sales than inventories for a third consecutive month that lowered the inventory-to-sales (I/S) ratio to 1.28 from 1.29 over the three months ending in March. There were sales gains of 0.8% in April, 0.4% in March, and 1.0% February. There was a 0.1% April inventory rise that beat the flat figure in the advance report, after an unrevised 0.2% March gain. There should be a boost of Q1 GDP growth to 2.4% from 2.2%, with no wholesale inventory revision, but boosts of $8 billion for net exports and $5 billion for construction alongside a $3 billion trimming in consumption. We expect Q2 GDP growth of 3.6%, with a flat Q2 inventory contribution that follows a $4.6 billion addition in Q1, leaving an assumed Q2 accumulation rate of a restrained $20 billion.