- The positive results of the Purchasing Managers' Index (PMI) readings for the US services and manufacturing sectors, which are stronger than expectations and even stronger than the Eurozone readings.
- Obviously, this led to a weakness in the EUR/USD price again, and losses extended to the support level of 1.0876.
- This is after the bulls succeeded in launching the currency pair towards the resistance level of 1.0932 in the same trading session.
- Currently, the pair is stable downward at the time of writing the analysis and before the European Central Bank announces the strongest driver for the euro this week and then announces the US economic growth reading.
On the economic side: Is the Eurozone Economy in Recession?
The eurozone economy was stuck in recession in January, according to the S&P Global's monthly purchasing managers' index survey. Recently, the composite purchasing managers' index (which includes the manufacturing and services sectors) in the eurozone fell to 47.9 in January, well below the consensus forecast of 49 and below the December reading of 48.8. Obviously, a reading below 50 is consistent with recession and confirms the likelihood that the eurozone economy is in a period of recession. Commenting on this, Bert Colijn, chief economist at ING Bank, said: "The eurozone economy continues to trend towards 0% growth and there are no signs of any imminent recovery. Also, inflation pressures are still rising for the services sector, providing another argument for the European Central Bank not to raise interest rates before June."
Yesterday, the reading of the purchasing managers' index for services in the eurozone was 48.4 (consensus: 49), a decline from 48.8 in December. Ultimately, Manufacturing is still in recession at 46.6, but this is up from 44.4 in December and above the consensus forecast of 44.8. In fact, the recovery in the manufacturing sector is likely the reason why the euro exchange rates have proved relatively resilient.
Overall, Germany remains a source of concern, as both the services purchasing managers' indices and the composite purchasing managers' indices came in below expectations and point to recession. However, the improvement in the German manufacturing purchasing managers' index to a reading of 45.4 from a reading of 43.3 (forecast: 43.7) provides a glimmer of hope that the most important sector of the economy may have bottomed out.
Meanwhile, France surprised with a decline in the services purchasing managers' index to a reading of 45 from 45.7 (forecast: 46). Also, The French index fell further into the recessionary zone to 44.2 from 44.8 (expected: 45.2). Among the concerns are the purchasing managers' index (PMI) reports about the concern about inflation. Although demand is still weak, cost pressures in services are rising again due to rising wage costs that are being passed on to consumers.
On another level, the European Central Bank will begin its first monetary policy meeting of the year and will issue its ruling on Thursday. Obviously, this meeting comes at a time when the European economy is not doing well, as countries such as Germany and France have announced slow growth. Also, the bloc is on the verge of slipping into recession as access to financing is still difficult.
Also, inflation in Europe is on the rise, and the crisis in the Middle East could worsen the situation. Recently, Eurostat data showed that inflation in the eurozone rose to 2.9% in December from 2.4% in the previous month. Moreover, the inflation rate in the European Union jumped to 3.4%, which is well above the medium-term target of 2.0%. Therefore, analysts expect the European Central Bank to keep interest rates at a record high of 4.50%. It will also leave the deposit rate at 4%.
EUR/USD Technical analysis and forecast:
As we mentioned before, the general trend of the EUR/USD pair is still bearish, and the support at 1.0880 will remain the key to the bears’ control over the trend. Moreover, if the European Central Bank abandons its tightening tone today and the US growth reading comes in stronger than expectations, the EUR/USD price may find downward pressure. Thus, it may push it towards the support levels 1.0835, 1.0770, and 1.0700, respectively. On the other hand, according to the performance on the daily chart, the movement of the currency pair towards the resistance levels 1.1000 and 1.1120 will be important for an upward shift.
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