EUR/USD Daily Forecast – Euro Recovers, Nearing Critical Resistance

EUR/USD recovered with a bit of momentum behind the move in early trading on Wednesday. The upward move was aided by stronger than expected European data and follows a miss in US data on Tuesday.
Jignesh Davda
EUR/USD

 

Services Sector in Euro Area Better Than Expected in August

The final release of the services PMI for the Euro area came in at 53.5 versus an expected 53.4. A figure above 50 indicates expansion which somewhat downplays some of the recent concerns of a recession. Aside from the broader Euro area figure, services were reported to expand in Spain, Italy, France, and Germany.

Today’s positive data out of Europe follows readings from the US on Tuesday that hint at weakness in the manufacturing sector. There were two figures released yesterday, both surveys of purchasing managers in the manufacturing industry. The first figure, released by Markit, came in at 50.3 versus the analyst estimate of 50.0. While ahead of expectations, and in expansionary territory, the figure is showing the industry on the borderline of a contraction. The same figure released by the Institute for Supply Management fell short of expectations and came in at 49.1. The last time this figure reflected a contraction was nearly three years ago.

Bears Might Look to Sell Into This Recovery

In yesterday’s daily forecast, I made the case that a technical breakdown seems to be in play for EUR/USD. In this context, it doesn’t look like the recovery will survive much longer and that sellers are likely to step in. The invalidation point for a bearish argument falls at 1.1050. If the pair closes above it, it would suggest that a reversal has taken place.

From a fundamental perspective, I think it is also important to look at the bigger picture. The GDP decline in Germany during the second quarter is hard to ignore, despite today’s positive figures. While PMI data for the services and manufacturing sectors came in a bit better than expected, it is important to consider that manufacturing activity is contracting in most Euro economies. As well, market participants will be focused on what the ECB will do next. Expectations are for a round of aggressive easing at the next meeting, the currency pair will tend to remain sensitive to any shifts in expectations ahead of it.

Technical Analysis

As mentioned above, and in yesterday’s report, a key level to the upside comes in at 1.1050. If sellers contain the rally below it, it should reassert the downtrend.

The near-term momentum and technicals, however, favor more upside. EUR/USD posted a bullish candle on a daily chart yesterday and technical traders will be paying close attention to it. If the pair closes anywhere near 1.1000 by the end of the day, the technicals would be even more convincing for further upside over the near-term.

EURUSD 4-Hour Chart

I think that the recovery in GBP/USD has put some pressure on the greenback. This will also tend to keep EUR/USD underpinned but it is important to remember that volatility in Sterling is expected to be heightened this week due to political events related to Brexit.

Bottom Line

  • EUR/USD shows strong upward momentum since hitting a low yesterday.
  • The near-term trend is bullish, but from a slightly broader perspective, the trend is bearish and sellers might look to take advantage of the recovery.
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