The euro-dollar pair sharply dropped at the start of the new trading week. Traders returned to the area of the 1.10 figure, simultaneously setting a nearly two-week price low. Such price dynamics are primarily due to weak PMI indices. Market participants reacted sharply to the release, considering the approaching ECB meeting, the results of which will be known this Thursday. Additionally, the market is witnessing a rise in risk-off sentiments amid disappointing data on China's economic growth.
The current fundamental backdrop has allowed EUR/USD sellers to break out of the 1.1150–1.1250 price range, within which they traded for several weeks. The pair may now approach the important support level at 1.1020 (the middle line of the Bollinger Bands indicator on the daily chart), although it needs to overcome the price barrier at 1.1050 (the Kijun-sen line on the same timeframe) to do so. However, speaking about any stable price movements at this point would be impractical as traders are facing crucial "tests" ahead, the results of which could significantly reshape the fundamental picture.
Poor PMI data
The release turned out to be outright disappointing: all components were in the red zone as they fell short of the forecasted levels. The published figures vividly illustrated the prevailing sentiments in the European business environment. The euro once again demonstrated its vulnerability, reminding EUR/USD traders that the European Central Bank has the power to sink or "revive" the euro.
The PMI indices reflected growing pessimism both in the manufacturing sector and the services sector. Today we received preliminary data for July, which allows drawing some conclusions about the dynamics of more "weighty" macroeconomic indicators.
The German manufacturing sector's business activity index surprised (unpleasantly) the most, plummeting to 38.8 points—the weakest result since May 2020 when the world was in the grip of the coronavirus crisis. The indicator has been below the key 50-point mark for 13 consecutive months and has been actively declining for the past three months. The business activity index in the German services sector is still holding above the 50-point target but also demonstrates negative dynamics—in July, it reached 52 points (forecasted to rise to 53.2 points). The indicator has been decreasing for the second consecutive month.
The French manufacturing sector's business activity index also hit a multi-month low, dropping to 44.5 points (forecasted to rise to 48 points), the weakest result since May 2020. The situation is no better in the services sector: in July, the index stood at 47.4 points, the lowest level since March 2021. The indicator has been consistently declining for the third consecutive month.
The Eurozone's manufacturing PMI also entered the red zone, dropping to 42.7 (the worst result since June 2020). The indicator demonstrates a declining trend for the sixth consecutive month. Services PMI looks "somewhat" better, but there is also a downward trajectory. The index remains above the 50-point target (July's result is 51.1), but it has been declining for the third consecutive month.
Consequences of the release
Such an eloquent result disappointed EUR/USD traders. Weak PMI indices, published ahead of the ECB's July meeting, weakened hawkish expectations regarding further actions by the European regulator. There is no doubt about the formal results of the July meeting: no one questions that the Central Bank will raise interest rates by 25 basis points on Thursday. However, today's release may soften the ECB's rhetoric regarding the prospects of further monetary policy tightening. According to currency strategists at the ING financial group, the European Central Bank is likely to "demonstrate not too sincere willingness to support the idea of the next rate hike in September." In other words, the ECB may question further steps towards tightening monetary policy, thereby putting pressure on the euro.
Undoubtedly, there are risks associated with such a scenario (and these risks have increased after today's release). However, the baseline scenario still assumes maintaining a hawkish stance by the ECB. The reason for this is inflation, which continues to remain at an unacceptably high level. As a reminder, according to revised data from last week, the core consumer price index in the eurozone rose to 5.5% (initial estimate is 5.4%). The headline HICP shows particular "stubbornness," causing justified concern for the European Central Bank. Given such trends, one should not expect significant softening of the ECB's statements.
Nevertheless, at the "moment," today's release put pressure on the euro, allowing EUR/USD bears to return to the area of the 1.10 figure. Can we consider selling in the current conditions? In my view—no. At least until sellers establish themselves below the support level of 1.1020 (the middle line of the Bollinger Bands on the daily chart). In this case, the Ichimoku indicator will form a "death cross" signal, where the Tenkan-sen and Kijun-sen lines on the daily chart will be above the price, and the Kumo cloud will be below it. This configuration will indicate the priority of short positions.
But for now, the situation remains in a suspended state. Sellers were not able to impulsively overcome even the intermediate resistance level of 1.1050 (the Kijun-sen line on D1). Therefore, at the moment, it is advisable to take a wait-and-see position on the pair.
