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Bearish Shift Still in Progress

  • Before the end of last week’s trading, the exchange rate of the euro against the dollar (EURUSD) came under noticeable pressure.
  • This is after the release of economic survey data, which one of the economists described as “horrific” and prompted economists to say that the time has come for the European Central Bank (ECB) to end the cycle of interest rate hikes.
  • In the last session, the price of the euro fell against the dollar, EUR/USD, to the support level of 1.0844, giving up all of its gains last week, which affected the resistance level of 1.1012, and closed the week’s trading stable around the level of 1.0890.

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S&P Global reported that its monthly PMI survey revealed that the eurozone economy contracted in June as the region’s economic recovery faded amid a decline in new business orders for the first time since January. The services PMI read at 52.4 in June, which was lower than the market expectation of 54.5, missing a significant loss to the downside, and pointing to a sharp slowdown from the impressive 55.1 in May.

Commenting on the performance of the currency pair, Kenneth Brooks, an analyst at Société Générale, says: “The euro extended to 1.4% from a high of 1.1012 after the frightening PMIs.”

The Manufacturing PMI came in at 43.6, putting the sector deeper into contraction territory. The market was looking for a reading of 44.8, bringing it in line with the May reading. Overall, the data left the Composite PMI – which gives a better assessment of the broader economy – at 50.3, putting it on the cusp of contraction. The market expected 52.5, which could have been slightly lower than the 52.8 in May. France appears to have suffered in June with a decline in manufacturing and services (45.5 and 48 respectively). Germany’s large manufacturing sector also disappointed with a reading of 41, putting what had been Europe’s growth engine deeper into contraction territory.

The Eurozone PMI survey revealed new business trends measured across goods and services worsened in June, with new orders falling for the first time since January, and a deteriorating demand environment pointing to downside risks to production in July according to S&P Global.

A decline in the Eurozone PMI indicates a decline in GDP.

The report found that manufacturing remains a key area of weakness in the eurozone, with factory production declining for the third month in a row and at the sharpest rate since last October. But growth in service sector output – which has so far kept the economy afloat – slowed sharply at the same time as the recent recovery in service spending lost momentum. In general, the decline in the price of the euro reflects the decline in yields of sovereign bonds in the euro area, which indicates a decline in market expectations regarding the European Central Bank’s raising of interest rates. A slowdown in inflation when combined with a slowing economy should give the ECB a reason to consider how much additional rate hikes should be. It is certain that at least one rate hike is coming, as directed by the ECB Governing Council members, but after this hike, question marks appear.

According to the performance on the daily chart below, the general trend of the EUR/USD currency pair has turned bearish. A move below the support level 1.0885 will support the bears’ control of the trend, and the bears’ breach of the psychological support level 1.0800 is still possible. There will not be a real shift towards the upside without moving to settle above the psychological resistance 1.1000 again. The future of central bank policy, led by the US Federal Reserve and the European Central Bank, will remain a major driver for the euro/dollar pair in the coming period.

I expect a relatively quiet trading session today as investors reacted strongly by the end of the week to the drivers of the currency pair.

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