Euro Analysis (EUR/USD, EUR/GBP, EUR/JPY)
- Germany leads EU manufacturing into a downward spiral
- EUR/USD: poor manufacturing print adds to eurusd woes
- EUR/GBP: Bearish momentum stalls around prior support
- EUR/JPY: Markets remain unconvinced of imminent policy change at the BoJ
- The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library
Germany Leads EU Manufacturing into a Downward Spiral
Germany expanded on its already poor manufacturing sector performance heading into the rest of the year. Last month, Germany registered a print of 41 (flash) which was lower than the 43.5 consensus. Matters got even worse when the final figure deteriorated even further to 40.6. Readings below 50 denote recessions or contractions while those above 50 indicate growth or expansion within the manufacturing industry.
July proved little different. A final reading of 38.8 (in line with forecasts) confirmed further weakness within the manufacturing sector, a trend that continues throughout Europe too. The manufacturing PMI print for the euro zone dropped form 43.4 to 42.7.
One of the most troubling take-aways from the report is that demand, via new orders, has fallen to levels last witnessed around 30 years ago and this is all despite the fastest decline in input and output costs since the global financial crisis.
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EUR/USD: Poor Manufacturing Print Adds to Euro Woes
In the aftermath of the final manufacturing data for July, EUR/USD heads lower. Bulls had challenged the bearish directional move around 1.1012 but appear to have been overrun by further bearish sentiment.
Trading within the descending channel, the pair now eyes the less significant 50% Fibonacci retracement of the 2021 – 2022 major decline, at 1.0947. Thereafter, 1.0910 and the April 2023 swing low of 1.0830 appear as potential levels of support.
The rather tight-lipped Fed and ECB policy statements provided little juice for the pair last week but a massive surprise in US Q2 GDP to the upside sent the pair from the top of the channel to eventually close below channel support. Technically, in the absence of bullish evidence, the near-term outlook favours lower prices with the RSI far from overbought on the daily chart and the MACD revealing bearish momentum.
EUR/USD Daily Chart
Source: TradingView, prepared by Richard Snow
EUR/GBP: Bearish Momentum Stalls Around Prior Support
With the Bank of England rate decision happening on Thursday, there is naturally a bit more attention on EUR/GBP. Better-than-expected inflation data in the UK forced markets to abandon the overwhelming probability of another 50-bps hike in favour of a smaller 25-bps hike instead.
After failing to test the zone of resistance around 0.8730, the pair revealed three successive daily candles with extended upper wicks – hinting at a rejection of higher prices which ultimately landed up in the recent selloff.
During and after the ECB meeting, the pair experienced a fair amount of volatility but prices have closed around the same level, 0.8565. This level was a prominent level of support in Sep/Nov/Dec of 2022.
The broader range that has encapsulated the majority of price action since June (0.8515 – 0.8635) remains in play, with prices eying 0.8515 in the event bears continue the selloff which is possible if the BoE feel it necessary to present a hawkish stance on Thursday or even opt for a surprise 50 bps hike.
On the other hand, a dovish message from the BoE could see a reprieve in recent selling, sending the pair higher over the short-term. However, given fundamental headwinds in the euro zone and ECB confirmation of being close to the terminal rate, any move higher is likely to encounter resistance.
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
EUR/JPY: Markets Remain Unconvinced of Imminent Policy Change at the BoJ
Traders who have been around for a while understand that when the carry trade unwinds it can be a force to be reckoned with. Although, the chances of any movement on the interest rate front remained low to none, markets had built up the possibility of another yield curve tweak which is exactly what transpired.
Allowing the yield on the 10-year Japanese Government Bond to move more flexibly above 0.5% is a step towards policy normalisation, but had the opposite effect after the dust settled.
The breakdown was immediately invalidated despite closing below the prior swing low of 153.45 in what looked like a signal for a broader reversal. The preceding double top added credence to the move but prices are sharply higher, potentially even looking at a retest of the double top at 157.93. Immediate resistance appears at 156.85 with support once again at channel support, followed by the troublesome level of 153.45
EUR/JPY Daily Chart
Source: TradingView, prepared by Richard Snow
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--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
