It will be a pivotal week for the euro, as preliminary euro area PMI surveys will hit the markets on Thursday, at 0900 GMT, and will be followed by the minutes of the ECB’s January meeting at 1230 GMT. The PMI is expected to have stabilised somewhat, which could allay some concerns around the euro area’s growth prospects and perhaps help the single currency recover a little, with relative interest rate differentials also providing support for euro/dollar.
It’s been a tough few months for the Eurozone. Economic data have disappointed time and again, with much of the weakness seen in otherwise “powerhouse” economies like Germany, while the third largest economy in the euro area – Italy – is now in a technical recession. Not only is growth lackluster, but underlying inflation remains subdued, a combination that allows little scope for the European Central Bank (ECB) to actually execute on the rate hikes it previously penciled in. The political environment isn’t any better, with Brexit uncertainties casting a long shadow, Spain headed for early elections and the looming risk that the US could slap tariffs on European cars.
Bearing all this in mind, investors will
On the bright side, forecasts suggest some stabilisation in February. Even though the manufacturing index is expected to dip to 50.3, from 50.5 in January, the services print that accounts for a greater portion of the economy is anticipated to tick up to 51.4, from 51.2 previously. As a result, the composite PMI that blends the two is forecast to inch higher to 51.1, from 51.0. If the actual figures meet expectations, that would be a signal that the worst may be over, which could help the euro recover somewhat. The prints from France and Germany will hit the markets earlier, at 08:00 and 08:30 GMT respectively; any market reaction could begin with them.
A few hours later, the minutes of the latest ECB meeting will be released. President Draghi didn’t reveal much back in January, with his message being that the slowdown is worrisome, but not enough to derail the Bank’s tightening plans. While the minutes are unlikely to reveal much more on this, the conversation around a new round of long-term loans to commercial banks, the so-called TLTROs, may attract attention.
Looking at the bigger picture, the bloc’s economic weakness has dragged EUR/USD much lower in recent months. Yet, rate differentials between Europe and the US have been narrowing in favor of the Eurozone since November, as investors priced out expectations for hikes by the Fed. This implies that relative interest rates are now providing support for the pair, and by extent, that the bears may have a difficult time piercing below the November lows at 1.1213. For such a break, sellers may require a major catalyst, like the US announcing tariffs on European autos – which seems unlikely for now. Having said that, until there’s a material improvement in the Eurozone’s data pulse, any major rebound in EUR/USD looks unlikely either.
Technically, another wave of declines in EUR/USD could encounter immediate support near 1.1255, the area that halted the pullback in mid-February, with a downside break opening the way for the November lows at 1.1213.
On the other hand, a recovery may stall near the 1.1400 level, where the 50- and 100-day simple moving averages (SMAs) are roughly located. A bullish violation could see buyers challenge the psychological 1.1500 level.
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