Euro gets whipped

You can’t go against the fundamentals. As much as euro supporters would like to see more rate hikes on deposits, the weak economy won’t allow it. The Eurozone composite Purchasing Managers’ Index (PMI) in June dropped to a five-month low of 50.3. This indicates that the recession that started in late 2022 and 2023 may prolong. Moreover, the ECB is prepared to aggressively raise rates further. Fearing the downturn, EUR/USD bulls were forced to retreat from the battlefield.

In June, France with its strikes dragged down the economy of the currency bloc. Although the issues in Germany’s manufacturing sector also played a negative role. Judging by the dynamics of the Purchasing Managers’ Index, French GDP is expected to contract by 0.5% in the second quarter. Furthermore, the latest statistics signal problems not only in manufacturing but also in the services sector.

PMIs in the eurozone

Disappointing PMI data led to a decline in European bond yields, as well as the presumed cap on the ECB deposit rate from 4.07% to 4%. It is unlikely that the ECB will push too hard by tightening monetary policy, as the economy weakens visibly and slides into a recession. Investors realize that the EUR/USD rally in response to the announcement of the June Governing Council meeting results went too far.

The market overestimated the determination of Christine Lagarde and her colleagues, and clearly underestimated the Federal Reserve’s intention to tame inflation. Derivatives suggest that the peak federal funds rate in this cycle will be 4.3%, which does not align with the FOMC forecast of 4.6%. It appears that the US dollar has room to grow, while the euro has room to fall.

The dynamics of market expectations and FOMC rate forecasts

Key events in the last week of June will be the release of data on German and European consumer prices, as well as the US Personal Consumption Expenditures Index. This inflation indicator is preferred by the Federal Reserve, although markets react less to it due to its lagging nature compared to CPI. According to experts surveyed by Bloomberg, core inflation in the Eurozone is expected to accelerate from 5.3% to 5.6%. In theory, this provides a basis for the ECB to raise the deposit rate. However, in practice, the central bank will surely consider its own economy.

Thus, the markets are overestimating the potential for monetary tightening by the ECB and going against the Federal Reserve. Considering the more favorable position of the US economy compared to the European one, this poses a risk for EUR/USD bulls. The first whipping occurred at the end of the five-day period leading up to June 23. I believe it will not be the last.

Technically, on the daily chart, EUR/USD formed and executed a reversal pattern called the Anti-Turtles. Despite the rebound from the weekly low, further movement of the pair will depend on the bears’ ability to stay within the fair value range of 1.072-1.090. If successful, the downward movement will continue, and we will be able to increase the shorts formed from the level of 1.098.

The material has been provided by InstaForex Company – www.instaforex.com