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EUR/USD Running Higher as Risk-On Sentiment Presses Down on the US Dollar

EUR/USD Running Higher as Risk-On Sentiment Presses Down on the US Dollar

Nick Cawley, Senior Strategist


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Euro-Zone PMI Data and EUR/USD Price, News and Analysis:

  • PMI data points to the Euro-Zone economy contracting by 9% this year.
  • EUR/USD rally has taken out notable resistance levels.
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Euro-Zone Final PMI Beats Forecasts but Contraction Remains Severe

The final Euro-Zone composite PMI (May) picked-up sharply from April’s multi-decade low, suggesting that economic slump in the region is starting to turn round. While encouraging, and with future PMIs likely to show business activity picking up as lockdown measures are unwound, Euro-Zone GDP is ‘set to fall at an unprecedented rate in the second quarter, accompanied by the largest rise in unemployment seen in the history of the euro area’ according to Chris Williamson, chief business economist at data provider IHS market.

The final Euro-Zone composite index rose to 31.9 compared to a flash reading of 30.5 and April’s multi-decade low of 13.6. The services index rose to 30.5 compared to a flash reading of 28.7 and a prior month’s 12.0.

The report noted that while optimism has returned, and pessimism moderated, ‘Our forecasters expect GDP to slump by almost 9% in 2020 and for a recovery to pre-pandemic levels of output to take several years’.

IHS Markit PMI Release

EUR/USD Benefits From Relentless US Dollar Slide

The global risk-on rally remains in full-flow with riskier assets in demand as central bank benevolence eclipses political and economic uncertainty. The safe-haven US dollar remains out of favor and has dropped below the important 200-day moving average and continues to print lower highs and lower lows, suggesting further losses ahead. The outlook for EUR/USD remains positive unless this risk tone reverses.

US Dollar Out of Favor, Global Risk Rally in Full Swing – Cross Asset Correlation

US Dollar Basket (DXY) Daily Price Chart (November 2019 – June 3, 2020)

Chart showing US dollar falling

The ECB meeting on Thursday will likely see the central bank increase its recently announced Pandemic Emergency Response Program (PEPP) further to boost market liquidity further. The original EUR 750 billion program launched in March is expected to be completed by October and as such a further increase of EUR 500-750 billion is likely to be announced Thursday.

The EUR/USD short-term rally off the May 25 low at 1.0870 continues with the pair breaking through the 200-dma on May 28 and not looking back. The 50% Fibonacci retracement of the March 9-22 sell-off was also broken on the same day, with the 61.8% Fib at 1.1107 also taken out this week. Higher lows and higher highs dominate recent price action and there is now little in the way of a complete re-trace of the March sell-off. The CCI indicator shows that the market is currently overbought, adding a note of caution to further upside, but overall unless the global risk sentiment changes or the US dollar gets a strong, lasting bid, EUR/USD looks set to probe fresh multi-week highs.

EUR/USD Daily Price Chart (October 2019 – June 3, 2020)

Chart showing eurusd rallying
EUR/USD Bearish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 14% -16% -4%
Weekly 2% -11% -6%
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What is your view on EUR/USD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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