Attempts to Rebound Still Weak

The euro’s exchange rates came under pressure after a batch of less-than-expected data from the euro-zone indicated that pressure to raise interest rates at the European Central Bank was easing. Accordingly, the bearish momentum of the EUR/USD currency pair increased, with losses affecting the support level 1.0635, before settling around 1.0690 at the beginning of Thursday’s trading session. It is the day that includes a group of important and influential economic data from both the Eurozone and the United States of America.

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Before that, German government inflation readings began to emerge when the state of North Rhine-Westphalia – a major economic region – revealed that inflation was -0.1% on a monthly basis in May, a significant drop from the 0.5% expected by the markets and a marked slowdown in April’s reading of 0.4. %. The data indicated that the headline reading – which will be released later in the day – was nil, which means that the inflation problem in the Eurozone may be fading away.

For the EUR, this means that the ECB has more options than previously expected when it comes to raising interest rates again. This affected the yields of sovereign bonds in the euro area, which led to a further decline in the exchange rates of the euro. EUR/USD fell 0.60% on the day to 1.0671, extending its decline for a month.

The divergence in inflationary dynamics between the eurozone and the UK is now particularly noticeable. As UK CPI data for April revealed expectations of outpacing inflation, prompting investors to raise bets that the Bank of England will continue to raise interest rates on a number of occasions over the coming months. This means that the yields of British bonds are witnessing an expansion in their premiums over the yields of the euro area, which led to the rise in the value of the pound sterling compared to the euro. French CPI followed Germany’s North Rhine-Westphalia in delivering a surprise: the headline read at -0.1% m/m in May, below expectations of 0.4% and representing a sharp contraction from the previous month’s 0.6%.

Luis de Guindos, vice-president of the European Central Bank, says financial markets are likely to respond with a sharp sell-off if further shocks hit the global economy. The stock market had a healthy start to the new year as China reopened, energy prices cooled, and most importantly, the eurozone economy remained resilient.

But that has pushed valuations too far, according to De Guindos, which increases the risk of a correction. “Valuations are high, premia risks are very compressed,” he told CNBC. Therefore, in case we have bad news regarding the macroeconomic outlook, which could lead to a correction in the financial markets.”

For its part, the European Central Bank published, on Wednesday, its Financial Stability Review of the Ball which indicates that the outlook for stability in the eurozone appears fragile. Credit risk continues to be a threat to stocks. Vice President de Guindos also spoke about the repercussions of the recent turmoil in the banking sector, which has resulted in the collapse of a number of US regional regions. Therefore, these events are likely to lead to a reassessment of the profitability and liquidity outlook of the Eurozone banks. As such, risk sentiment remains fragile and very sensitive to surprises. The ECB report also warned that credit risk could eventually trickle down to non-bank players in the financial space.

• There is no change in my technical view of the performance of the price of the EUR/USD currency pair, as the general trend is still bearish.
• The act of approving the US debt ceiling and moving below the psychological support level 1.0800 still supports bears’ strong control over the trend.
• Its losses, extending to the vicinity of the next psychological support 1.0600, are sufficient to move the technical indicators towards strong oversold levels.

On the other hand, according to the performance on the daily chart, the EUR/USD currency pair will not have the opportunity to change the downward direction without moving towards the psychological resistance level 1.10 again. This requires first passing through the resistance levels 1.0830 and 1.0900, respectively. The euro/dollar currency pair will be affected today by the announcement of inflation figures in the eurozone, then the announcement of the ADP reading of US non-farm employment, jobless claims, and the reading of the ISM Manufacturing PMI.

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