EUR/USD is hovering near its August high of 1.12 and still enjoying mild support from the massive Chinese stimulus package announced yesterday, which sent equities soaring and provided support for all cyclicals, especially the commodity dollar.
China’s attempts to rejuvenate its economy have certainly had an impact, along with the weakening US consumer confidence seen yesterday, which adds to the optimistic outlook sparked by last week’s interest rate cut by the Federal Reserve.
But despite these international factors, domestic concerns about the German economy remain, leading traders to refrain from taking on large euro buying positions despite the dollar’s overall weakness.
For now, we are not seeing a bearish reversal in EUR/USD, but that could change soon if the Eurozone data remains weak.
Eurozone growth engine stalls
Germany, the euro zone’s largest economy, has raised fears of a recession after releasing some pretty weak PMI data on Monday. Manufacturing, in particular, appears to be contracting at a faster pace each month, with the PMI now at 40.3. The services sector PMI was also weaker than expected. Indeed, France and the euro zone PMIs were also pretty weak.
Following these disappointing PMI numbers, nobody expected Germany’s Ifo business climate index (a composite index based on 9,000 surveyed manufacturers, builders, wholesalers, service providers and retailers) to show an improvement when it was released yesterday, and as expected, it came in at 85.4, not only below the expected 86.1 but also down from the previous month’s reading of 86.6.
EUR/USD Upside Limited
With the ECB hesitant to cut rates anytime soon and the Chinese economy far from its growth target of supporting euro zone exports, one has to wonder where euro zone growth will come from. That’s why traders are in no rush to buy euros, even as Chinese stocks surge as a result of the latest stimulus package.
The story continues
Today’s US calendar looks bright
There will be no major data releases from the US as attention shifts to the US later in the afternoon. However, the US economic calendar will be a bit busier later this week. Major data releases this week include new home sales (today), final GDP estimates (Thursday), and the core PCE index (Friday).
Several speeches from Federal Reserve officials are scheduled for Thursday. Yesterday, the Conference Board’s US Consumer Sentiment Index was released, which was expected to rise to 103.9 in September from 103.3 in August, but came in at 98.7, defying expectations and providing continued support for EUR/USD.
The outlook for the US dollar will depend heavily on upcoming economic data. The Fed’s decision to cut interest rates by 50 basis points last week was somewhat expected and the surprise has already been priced in. For the US dollar to weaken further, traders would need to see further signs of an economic slowdown, especially in the labor market.
Last week, the Fed cut interest rates by 50 basis points and signaled it could cut them by another 50 points by the end of the year, while also lowering its growth and inflation forecasts. The Fed chairman said the cut was a step toward ending a historic tightening cycle and was aimed at keeping the economy strong and reducing the risk of a recession.
Future developments will depend on the labor market and, to a lesser extent, inflation data. Inflation is no longer a major concern for the Fed, but an unexpected upside surprise in core PCE data could disrupt the current outlook and make EUR/USD forecasts bearish.
EUR/USD Technical Analysis and Trade Ideas
Stability is key for EUR/USD, which is currently supported almost entirely by a weaker US dollar and renewed optimism about China (one of Europe’s main export destinations).
EUR/USD daily chart
Source: TradingView.com
Support around 1.1100 is holding for now, but a break of a close below this could lead to a drop to 1.1000 or below in the coming days.
Resistance is near the August peak at 1.1200. So far, there is no sign of a bearish reversal on the charts, but that could change soon if economic data from the Eurozone continues to disappoint.
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Disclaimer: This article is written for informational purposes only. It does not constitute an investment solicitation, offer, advice, counsel or recommendation, and is not intended to encourage the purchase of any assets in any form. Please be aware that any type of asset is evaluated from multiple perspectives and is highly risky, so investment decisions and the associated risks are borne by the investor.
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