EUR/USD Returns Some Gains as Eurozone PMI Data Underwhelm

EURUSD Rate, Charts and Analysis:

• EUR/USD Back off Monday

• PMI numbers in the Eurozone remained weak, especially the German manufacturing sector

• US data is rising next, in what is likely to be a weak US holiday trading day

The Euro kicked off a fresh week lower against the US Dollar, recovering some of the strong rebound on Friday, as economic data from Eurozone economies continued to disappoint.

Monday has already seen several PMI figures released, from Europe and elsewhere. These closely watched indicators offer a timely guide to the economic direction, with the latest European indices generally shaky, with the German manufacturing release perhaps the most worrying. The headline number there has been below the key 50 level that separates expansion from contraction since July last year, and the latest June release was unfortunately no exception. The PMI fell to 40.6, its weakest level in three years, as companies reported deeper production cuts as demand continued to fall.

The French PMI was slightly better than expected, but still deep in contraction territory.

The Eurozone continues to face higher interest rates as the European Central Bank struggles to control inflation. Indeed, last month Christine Lagarde, the president of the European Central Bank, came close to ensuring central bankers would guarantee borrowing costs would rise again in July.

That being the case, it is likely that European manufacturers will have more bad news as tighter monetary policy is bound to reduce demand further, which is in fact their primary goal.

China’s manufacturing sector continues to expand, but the rate at which it does so has slowed significantly. The focus will now shift to the US, where the Supply Management PMI is due later in the session. It is also expected to show continued deflation.

It is worth noting that Monday will see a shorter trading session in the US before the Independence Day holiday on Tuesday, and the market has experienced lower than usual trading conditions.

Technical analysis of the EUR/USD pair

EURUSD daily chart

Chart compiled using TradingView

The EUR/USD pair has breached a sharp bullish trend on the daily chart which until last week had been building up to its resistance from the early June lows.

That fight appears to be fading below the 13-month peak in May at 1.10998, and the bulls have work to do if they are to get it back on track.

However, their reason is not yet lost as the market is still quite high by recent standards and still sitting above support even on the first Fibonacci retracement of the impressive rally from last September’s lows to May’s highs.

This now offers a support at 1.07307. EUR/USD fell on Monday through psychological support at 1.09, and while weak holiday trading may mean that this floor has been pulled back later in the week, the resistance at last Tuesday’s high at 1.09758, perhaps at the very least, will need to be regained. If the market will rise to its highest levels this year.

IG’s sentiment data found market sentiment towards the pair mixed at the moment. On a fundamental level, this is probably not surprising given that the prospect of higher interest rates should probably be supportive, even if the underlying economic conditions are not necessitating it. For the time being, there is modest preference for short positions, reflecting the market action seen since the Euro broke its downtrend but fell further.

Non-conformists might be wise to wait until this major US holiday is over to get a clearer picture of near-term sentiment towards the single currency.

– By David Cottle for DailyFX