The EUR/USD continued to consolidate ahead of the Fed decision on Wednesday and the ECB decision on monetary policy on Thursday. The currency pair held up well despite a disappointing German ZEW survey, which was offset by an as expected U.S. CPI report.
The EUR/USD rebounded after testing support near the 10-day moving average near 1.1735. Resistance is seen near the June highs at 1.1840. Additional resistance is seen near the 50-day moving average at 1.1977. Momentum is turning from positive to negative as the fast stochastic is generating a crossover sell signal in overbought territory which points to a correction.
German ZEW is Weaker than Expected
German ZEW investor confidence weaker than expected. The headline expectations reading fell back to -16.1 in June from -8.2 in May. – a sharper decline than anticipated and indicating that the number of those pessimistic about the outlook is now clearly exceeding the number of optimists. Indeed, this is the lowest reading since September 2012 and considerably below the long term average of +23.3. The assessment of the current situation declined by 6.8 points to now 80.6.
ZEW’s Wambach reported that the latest escalation of trade conflicts as well as concerns that the new Italian government will undermine financial stability in the Eurozone left their mark on the overall reading. At the same time, a weaker than expected data round for April added to concern about the outlook for the German economy, although the reading for the economic situation in the Eurozone actually dropped even more than the German one. More signs then that the German and Eurozone recoveries have already peaked and might cool much faster than previously thought. In our view that won’t prevent the ECB from committing to a phasing out of QE by the end of the year at Thursday’s council meeting, but we would expect Draghi to wrap the hawkish turn in relatively dovish language and guidance on rates.
CPI Rose in May in Line with Expectations
U.S. CPI rose 0.2% in May, with the core up 0.2%, both in line with expectations. There were no revisions to April where consumer prices were up 0.2% overall, and 0.1% excluding food and energy. The annual pace accelerated to 2.8% year over year for the headline from 2.5% year over year, and 2.2% year over year for the core versus 2.1% year over year. Energy prices were 0.9% higher following the 1.4% April bounce, and are up 11.7% year over year. Transportation prices edged up 0.4% versus the prior 0.2% gain. Services costs rose 0.2% from 0.1%. Housing costs were up 0.2% from 0.3%, with owners’ equivalent rent 0.2% higher from 0.3%. Apparel prices were unchanged after a 0.3% gain. Medical care costs rose 0.2% after April’s 0.1% gain. Education and computer prices rose 0.4% from unchanged. Tobacco prices were up 0.4% from 1.3%.
U.S. chain store sales bounced
U.S. chain store sales bounced 1.7% in the week ended June 9, according to The Retail Economist, after plunging 5.6% in the June 2 week. The annual pace accelerated to a 4.4% year over year clip versus the prior 3.8% year over year rate. The report noted consumer demand remains quite healthy in the second quarter of the retail calendar, while easier comparisons are helping boost the year over year pace.
UK labor data revealed a softening in wage growth
UK labor data revealed a softening in wage growth, which dipped to 2.5% year over year growth in the three months to April, down from 2.6% year over year in the month prior and below the median forecast for an unchanged 2.6% year over year outcome. The ex-bonus income figure dipped to a growth rate of 2.8% year over year from 2.9% year over year in the three months to March, also below the median forecast for an unchanged 2.9% year over year reading. The unemployment rate remained unchanged, at 4.2%, which is a multi-decade low, in March, which met the median forecast.