Euro Weakens on Decline in Manufacturing

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The EUR/USD fell sharply on Thursday after an index of Euro Zone services and manufacturing declined to a three-year low. The bearish news hit the market just as technical factors began to show that the Euro still had plenty of room to fall against the dollar. With the economic news showing that the sovereign debt crisis is having a negative effect on the Euro Zone economy, sentiment is shifting in the market, signaling that the market has more to go on the downside.

Because of the drop in demand for higher risk assets, the U.S. Dollar and the Japanese Yen are showing strength as traders move money into so-called safer currencies. Additionally, reports showing that China’s manufacturing and Japanese exports fell, also drove traders into the Greenback and Yen.

The current weakness in the Euro is beginning to look like proof that the last rally was more of a “buy the rumor, sell the fact” situation. The economic problems that were present prior to the vow in July by European Central Bank President Mario Draghi to do “whatever it takes” to preserve the Euro are showing signs of worsening. Although current forecasts call for the Euro to test 1.2800 over the near-term, some traders fell that it could even retrace as much as 50% of the rally from 1.2042 to 1.3172.

The report that triggered today’s sell-off was a composite index based on a survey of purchasing managers in Euro Zone services and manufacturing industries. This index fell to 45.9 in September, well below 50, the benchmark number that represents contraction.

Although the ECB may have taken sovereign debt issues off the table because of its plan to buy distressed bonds, Euro traders are shifting their focus on the European economy. Proof of this is today’s weakness in the Euro which came even after Spain’s borrowing costs fell at today’s auction. The selling pressure seen today suggests that short-traders are taking control once again because they believe that the Euro Zone economy is going to get worse before it improves.

Expectations of worsening conditions in Europe are spreading to the GBP/USD which saw renewed selling pressure earlier in the trading session. Like the other higher-yielding currencies, the Sterling is also falling victim to a stronger dollar because of today’s flight to safety. The Bank of England minutes which were released earlier in the week are also weighing on the British Pound. Based on these minutes, inflation is expected to decline at a much slower pace than estimated, leading traders to believe that the central bank will have to increase the allocation of its asset buyback program. This action should pressure the Sterling against the U.S. Dollar.

November Crude Oil is getting hit hard again today in a move that started earlier in the week. The slowing global economy is expected to curtail demand for oil which is likely to mean a rise in inventory. Combining this with the news that Saudi Arabia is pumping oil at a record pace, expectations are for the market to drop below $90 per barrel before it catches a bid.

December Gold is also under pressure today because of the strong U.S. Dollar. Although the market hasn’t begun its correction yet, the longer its stays in a tight range near the top, the greater the breakout to the downside that can be expected. Technical traders should watch for an acceleration to the downside if $1753.20 is violated. This move will also change the trend to down on the daily chart. 

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About: FX Empire Analyst - James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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