The EUR/USD exchange rate rose sharply to recover the 1.06 resistance level before the weekend. This was after a mixed set of US economic figures including US Nonfarm Payrolls report which was followed by a significant drop in an important indicator of activity in the services sector. The rebound gains for the EUR/USD pair were to reach the resistance level of 1.0648, before closing last week's trading, stable around the level of 1.0639.
The price of the euro was stable below the support level of 1.0500 before the Bureau of Labor Statistics announced a larger-than-expected increase in US employment that sent the unemployment rate in the country to an all-time low of 3.5% seen at various points in the past year. US jobs data had previously managed to correct the euro's inversion against the dollar, but it was the large 6.9-point drop in the ISM Services PMI that really drove the euro's momentum. Commenting on that, Ian Shepherdson, chief economist at Pantheon Macroeconomics, says: Ambitious, given that the November reading was a surprisingly bullish surprise and seemed ready for a correction, but the decline is much larger than we expected.”
"The data for the past two months clearly shows that this is a choppy survey, and the odd monthly numbers can't be taken seriously, but the headline number is staggering and a repeat performance in January should cause alarm bells to ring," he adds.
Friday's poll showed that the ISM Services index fell from a reading of 56.5 to a reading of 49.6 in one fell swoop for December, dropping it from a reasonably healthy level to the kind of bottom that usually goes along with recessionary conditions in the most important sector of the US economy. One potential saving grace, however, is the prospect of a downturn on Friday that merely reflects a seasonal anomaly in responses to the ISM survey given that the exact same kind of unfathomable recession was also reported in January of last year in the report covering December 2021.
For his part, Andrew Grantham, an economist at CIBC Capital Markets, wrote in a review of the survey results: “While the business activity index also fell sharply compared to the previous month, it remained in expansionary territory at 54.7.” He adds, “While the latest tracking indicates that GDP growth has stabilized much better than expected in the fourth quarter of last year, this decline in the ISM services index will raise concerns that the economy is rapidly losing momentum and could start 2023 on weak foundation.”
The ISM index of business activity recorded a “significant decline – 10 percentage points –” and the index of new orders fell by more than 10% in its first contraction since May 2020 while the employment index also fell.
Friday's report came as the Census Bureau reported a -1.8% decline in US factory production for the month of November and after the Bureau of Labor Statistics reported a 223,000 increase in US non-farm payrolls for December, which helped push the country's unemployment rate down to 3.5% from 3.6%. ISM previously said its manufacturing PMI fell from 49.0 to 48.4 in December after new orders and production levels contracted along with manufacturing imports, exports, prices, and work backlogs. Commenting on this, Tim Quinlan, chief economist at Wells Fargo says, "One of the troubling things about the ISM report on services is that the service economy is joining the manufacturing side of the economy in a contraction." And “The recession is coming according to our expectations, but this does not indicate its beginning. The decline in service sector activity in ISM indicates the idiosyncrasies of running a business amid still high prices, a still tight labor market and a not entirely stable supply chain.”
Technical forecasts for the EUR/USD pair:
- In the near term and according to the performance of the hourly chart, it appears that the EUR/USD currency pair has recently completed a bearish breach from an ascending channel.
- This indicates a significant short-term bearish bias in market sentiment.
- The bears will be looking to extend the current decline towards 1.0502 or below to support 1.0474.
- On the other hand, the bulls will target profits around 1.0552 or higher at the resistance 1.0579.
On the long term, and according to the performance on the daily chart, it appears that the EUR/USD currency pair is about to complete a bearish breach from forming an ascending channel. This indicates that the bears are trying to control the direction of the currency pair. Therefore, they will look to extend current declines towards 1.0433 or lower to 1.0324 support. On the other hand, the bulls will target potential bounces around 1.0628 or higher at 1.0731 resistance.
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