EUR/USD: Disappointing activity indicators, especially for German industry

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The single currency suffered this morning from unfavorable signals on growth, with a battery of PMI activity indicators in the Euro Zone. While the synthetic score for the Euro Zone as a whole is 1.3 points away from the target for industry, the disappointment is clear for the German score alone, with the PMI melting down to 42.9, completely missing the target.

Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented on the figures. The optimism of industrialists in the Euro Zone as to their 12-month business outlook has fallen back compared to April, while the volume of their sales has fallen sharply and their purchasing activity, just like the level of their inventories, decreased over the month.

“Order developments are not alarming, however, with EuroStat data for the second quarter highlighting order books well above their long-term averages in the major monetary union economies.”

As a reminder, the PMIs are activity barometers calculated after analysis and processing of a survey carried out among purchasing managers, hence the acronym meaning Purchasing Managers Index. A score above 50 points means an expansion of the sector considered, conversely a score below 50 suggests a contraction.

Currency traders remain preoccupied with the burning issue of US government debt. But negotiations between Democratic and Republican leaders in Congress have stalled since the second half of last week.

“While the (upcoming) increase in the debt ceiling should not have a direct impact on the Fed’s short-term monetary policy, it is on the other hand likely that the agreement which will be reached will be conditional on a reduction in spending, which will de facto have an impact on American growth and could therefore play into the hands of a more dovish Fed” judge Thomas Giudici, head of bond management Auris Gestion.

“Indeed, if the American economy is still showing signs of resilience, as evidenced by the publication of retail sales or industrial production for the month of April, the spending reduction plan proposed by the Republican Speaker of the House representatives, Kevin McCarthy, would, according to Moody’s Analytics, have a negative impact of 0.6% on American growth in 2024 with job losses of 780,000, i.e. an increase in unemployment of more than 1%.

To follow the sales of new homes across the Atlantic, and the manufacturing index of the Fecd of Richmond at 4:00 p.m. Earlier, at 2:30 p.m., the US PMIs will be published as first estimates for the current month.

At midday on the foreign exchange market, the Euro was trading against $1.0730 approximately.

KEY GRAPHIC ELEMENTS

The identified and fully validated ascending channel exit is accompanied by a triple top structure (04/14, 04/26, 05/04)*, which supports our bearish scenario on the flagship currency pair. We are now monitoring the relative momentum of the moving averages, keeping in mind that the price/RSI divergence has already sent a pessimistic message. If the 20-day moving average (in dark blue) were to cut the trajectory of its 50-day counterpart (in orange) downwards, the bearish message would come out stronger. This technical event is imminent.

MEDIUM TERM FORECAST

In view of the key graphic factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD) parity.

Our entry point is at 1.0776 USD. The price target of our bearish scenario is at 1.0436 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0911 USD.

The expected return of this Forex strategy is 340 pips and the risk of loss is 135 pips.

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