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Euro Runs into Trouble at the Top

Euro Runs into Trouble at the Top

Boris Schlossberg, Technical Strategist

Talking Points:

  • PMI Data Throws EUR for a Loop
  • ECB Policy Changes Could Be Upcoming
  • Chinese PMI Data Offers Small Relief
  • Dollar Safe-Haven Flows Still in Play

The euro (EUR) set fresh two-year highs in today’s Asian session, but was quickly knocked for a loop after Eurozone flash PMI showed a surprising deceleration in activity.

EURUSD rose to a high of 1.3822 in late-afternoon Asian dealing as better risk appetite and stop hunting around the 1.3800 figure helped to push the pair higher in thin Tokyo trade. However, the pair quickly reversed course as weaker-than-expected flash PMI data indicated a slowdown, particularly in the services sector.

The flash PMI readings were generally weak across the board, with French manufacturing PMI slipping back below the key 50 boom/bust line by printing at 49.4 versus 50.3 expected. French services sector activity declined to 50.2 from 51.2 forecast.

In Germany, the manufacturing sector managed to remain relatively firm, with flash PMI readings printing at 51.5 versus 51.6 projected, but the services component dropped sharply, printing at 52.3 from 53.8 expected.

The broad Eurozone PMI data remained steady in the manufacturing sector, coming in at 51.3 versus 51.4, but services tumbled, registering only 50.9 versus 52.3 last month. This was the first monthly decline since March 2012, and it was also the biggest miss since that time last year. The news suggests that the Eurozone recovery may be starting to stall, and the recent appreciation of the shared currency may only exacerbate that trend.

ECB Policy Gets Put to the Test

Up until now, the European Central Bank (ECB) has been remarkably nonchalant about the strengthening of the euro, but ECB President Mario Draghi may change his tone at next month's press conference if the central bank forecasts suggest the recovery is in danger of faltering.

Many analysts have pointed out that part of the reason for euro's strength has been the fact that the ECB has quietly but steadily shrunken its balance sheet, while the other G-3 central banks continue to expand theirs. Therefore, it will be interesting to see if Draghi assumes a more aggressively accommodative posture at next month's meeting.

Meanwhile, EURUSD tumbled below the 1.3800 barrier in the aftermath of the news release, but the pair managed to find buyers ahead of 1.3750 and remained within striking distance of that 1.3800 level. The euro continues to show tremendous resilience in light of weaker economic data, but if tomorrow's IFO survey shows a big drop in sentiment, EURUSD may correct back towards 1.3700 as this week's trade comes to a close.

Safe-Haven Flows Still in Tact

Elsewhere, the only other report of note was the slight improvement in Chinese manufacturing PMI, which increased to 50.9 from 50.5. This was the third consecutive month of readings above the 50 boom/bust line, and it provided a modicum of relief to investors still rattled by yesterday's news of sharp writedowns at Chinese banks.

See also: China Bank News Kills the High-Beta Heyday

The Australian dollar (AUD) initially rallied on the news, but drifted lower as the European session wore on, and the Aussie was trading near the day's lows as selling pressures on the unit persist.

In North America today, the economic calendar is relatively light with trade balance, jobless claims, and new home sales data on the docket. The news is likely to be skewed by the government shutdown, however, and as a result, it’s difficult to say how the currency markets will react.

For now, modest US dollar (USD) strength continues to prevail, and that trend may accelerate as the day progresses.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.