EUR/USD: Germany's ZEW index kills the technical rebound

If things remain bearish on the EUR/USD pair, it is necessary to note the presence of a fragile support zone around $1.1850, on which the single currency has been leaning since the beginning of the week in the absence of a reference from the United States. Wall Street remained closed yesterday, Monday, July 5, as the 4th of July national holiday fell on a Sunday this year.

Yesterday, traders had to deal with the publication of the final data of the PMI (IHS Markit) Services (and therefore now Composite) for the Eurozone. At the scale of the monetary union, the score is 58.2 for services (above the first estimates) and the Composite reaches 59.6. Chris Williams, Chief Business Economist at IHS Markit, adds:

"A wave of optimism that the worst of the pandemic is behind us has propelled business growth expectations to a 20-year high, boding well for the recovery to strengthen in the months ahead. However, in part due to the shortage of labour supply - which means greater pricing power - the recent rise in inflationary pressures is by no means limited to the manufacturing sector. Service sector companies are raising prices at the fastest pace in more than 15 years as costs rise, accompanying a similar jump in manufacturing prices to signal a generalized increase in inflationary pressures."

The attempted technical rebound that began on Tuesday was nipped in the bud with the release of Germany's ZEW economic confidence index, down sharply to 63.4. The president of the Zentrum fur Europaische Wirtschaftsforschung, Professor Achim Wambach, sheds light on the matter, saying, "The economic development continues to normalise. In the meantime, the situation indicator for Germany has clearly overcome the coronavirus-related decline. Although the ZEW economic sentiment indicator has again fallen considerably, it is still at a very high level. The financial situation market experts therefore expect the overall economic situation to be extraordinarily positive over the next few months."

As a reminder, on Friday, the NFP (for Non Farm Payrolls) report came out mixed, with no real message clearly delivered to the Fed to feed its monetary thinking. On the one hand, the unemployment rate, which was expected to fall to 5.7% of the active population, actually rose to 6.0% (compared to 5.7% in May), while the number of jobs created in the private sector (excluding agriculture) clearly beat expectations, with 845,000 jobs created. The growth of average hourly wages remains within expectations (+0.4%), without any "overheating" that could lead to fears of inflationary slippage. This is what the Fed, and through it the financial community, is looking for in this type of report: the degree of imbalance between supply and demand on employment in the midst of a recovery, wage increases and their potential impact on prices... Here, the reading is rather counterintuitive.

"Despite this catch-up, employment is still 6.7 million below February 2020," note OSTRUM AM analysts. "Converging to the pre-Health Crisis trend by the end of 2025 suggests 425,000 jobs per month over the entire period. This will not happen and the labor market balance will be below pre-crisis levels even if the unemployment rate declines from the 6.0% figure recorded last month."

Next up is the ISM Services PMI at 16:00 (European time) for the US.

Right now, the pair is trading at $1.1845.

KEY CHART ELEMENTS

After a contentious reaction from June 21 to 23, the spot quickly turned around, tracing three long high shadows in a row.

A fragile guardrail is nevertheless taking shape around $1.1848.

MEDIUM TERM FORECAST

Based on the key chart factors we have mentioned, our medium-term view is negative on the EUR/USD.

Our entry point is $1.1842. The price target of our bearish scenario is at $1.1699. In order to preserve the capital invested, we advise you to position a protective stop at $1.1901.

The expected return on this Forex strategy is 143 pips and the risk of loss is 59 pips.