The EUR/USD currency pair is facing difficulties gaining momentum despite a weaker U.S. dollar at the beginning of the week after the release of negative economic survey data deemed “horrific” by economists.
It led the calls for the European Central Bank (ECB) to halt its cycle of interest rate hikes. In the final session, the Euro’s value declined against the dollar, dropping to the support level of 1.0844. It surrendered all its gains the previous week, affecting the resistance level of 1.1012. The week’s trading concluded with the Euro stabilizing around 1.0890.
According to Bloomberg’s FX model, there is a 74 percent chance that EUR/USD will trade within the range of 1.0784 to 1.1010 this week.
IG Client Sentiment data show that retail traders are short on EUR/USD, with 54 percent holding short positions. DailyFX said that the fact that traders are leaning towards short positions implies a chance for a brief rebound in EUR/USD before it resumes its downward trend.
As geopolitical tensions around Russia have eased, the market’s attention is shifting toward the ECB Central Bank Forum. Later in the day, ECB President Christine Lagarde is scheduled to deliver a speech, joined by several ECB policymakers who will also share their perspectives in the following days. However, the market is immune to the persistent hawkish stance of the central bank, as recent comments have had minimal impact.
As a result, Lagarde’s upcoming address becomes even more intriguing as it may provide insights into the current mindset of market participants.
Services PMI falls short of market expectations
According to the latest PMI survey by S&P Global, the eurozone economy experienced a contraction in June. The region’s economic recovery showed signs of fading as new business orders declined for the first time since January.
The services PMI for June was recorded at 52.4, falling short of the market expectation of 54.5. This slowdown indicates a notable decline from the strong reading of 55.1 observed in May and suggests a significant slowdown in the sector.
Commenting about the currency pair’s performance, Kenneth Brooks, an analyst at Société Générale, said that the Euro suffered a considerable decline of 1.4 percent from its previous high of 1.1012 after the PMI data came in below expectations.
“The euro extended to 1.4% from a high of 1.1012 after the frightening PMIs.”
Kenneth Brooks, Société Générale analyst
The manufacturing sector experienced a further decline as the Manufacturing PMI dropped to 43.6, indicating a deeper contraction. This figure fell short of the market’s expectation of 44.8, aligning with the May reading.
The Composite PMI, which provides a broader assessment of the economy, stood at 50.3, hovering on the edge of contraction. The market had anticipated 52.5, lower than May’s 52.8. France faced challenges in June, with manufacturing (45.5) and services (48) experiencing declines.
S&P Global’s latest Eurozone PMI survey revealed a deterioration in new business trends across goods and services during June. This downturn resulted in a decline in new orders, which hadn’t been observed since January. The survey findings also indicated a worsening demand environment, indicating potential risks for production in July.
The eurozone report also highlighted that the manufacturing sector continues to be weak, with factory production declining for the third consecutive month and at the sharpest rate since last October. Although the service sector has kept the economy afloat, its growth has slowed, coinciding with a decreased momentum in service spending.
The decrease in the Euro’s value can be attributed to declining yields of sovereign bonds in the euro area, which suggests a decrease in market expectations regarding the European Central Bank’s plan to raise interest rates.
With inflation slowing down and the economy showing signs of deceleration, the ECB must consider the extent of more rate hikes. While at least one rate hike is certain, as directed by the ECB Governing Council members, uncertainties arise beyond this initial hike.