EUR/USD: Eurozone Business Growth Stalls, ECB Faces Policy Dilemma

Highlights

• Eurozone business growth virtually stalled, manufacturing recession deepened.
• ECB faces policy dilemma with high inflation and weak economic activity.
• PMI data shows decline in services and manufacturing sectors.

Overview

The Euro faced a significant decline against the dollar as business growth in the eurozone virtually stalled this month. The latest data revealed a deepening manufacturing recession and minimal expansion in the dominant services sector, with overall demand falling for the first time since January. This slowdown presents a policy dilemma for the European Central Bank (ECB) as it continues with rate hikes to combat inflation.

Eurozone PMI Hits 5-Month Low

HCOB’s flash Composite PMI for the eurozone dropped to 50.3 in June, a five-month low. This figure is barely above the threshold of 50, indicating stagnation. The bloc’s economy, recovering from a recession, dampens hopes for a swift rebound. Despite strong holiday bookings, uncertainty looms over the overall economic outlook.

ECB’s Challenging Situation

The ECB faces challenges with high inflation and a strong labor market, suggesting potential price pressures. However, economic activity remains weak, and the ECB’s attempts to tighten policies without causing a recession have failed. Firms hoarding labor worsen the situation, with low joblessness and high nominal wage growth.

ECB Navigates Inflation Concerns, Rate Hike Plans

While policymakers who prioritize inflation concerns are currently in the majority, the possibility of another quarter of negative GDP growth looms. Yet, the current slump seems mild enough for the ECB to maintain its course on rate hikes. The ECB has already promised a rate hike in July, with discussions of a potential further increase to 4% in September or October.

PMI Data Shows Declines, Dragging Eurozone Business

Surprisingly, the PMI data for the services industry and manufacturing activity revealed significant declines, with Germany’s manufacturing sector dragging down the bloc. Business activity in Germany slowed, with decelerating growth in the services sector and worsening manufacturing figures. French business activity also contracted for the first time in five months.

Cautious Sentiment: Rate Hikes and Safe-Haven Seekers

While higher interest rates typically support currencies, the risk of triggering an economic downturn has led some investors to seek safe-haven assets like the U.S. dollar. This cautious sentiment reflects concerns about the potential impact of rate hikes on the eurozone economy.

Technical Analysis

EUR/USD market sentiment remains bearish as the current 4-hour price of 1.0865 shows a slight increase from the previous close. However, the price is below the 200-4H moving average of 1.0904 and the 50-4H moving average of 1.0816, indicating a downward trend. The 14-4H RSI at 36.60 suggests a neutral to slightly bearish sentiment.

The main support area is between 1.0667 and 1.0635, while the main resistance area is between 1.1006 and 1.1074. Overall, traders should be cautious as the market remains bearish, and further downward movement is anticipated in the near term.