EUR/USD: the pair continues to drop

There was less dispersion between the main risk asset classes, mainly commodities, equities and the Euro, reflecting the increasing likelihood of a recession in the main economic centres on both sides of the Atlantic. The Composite PMIs, released yesterday, sent a clearly pessimistic message.

The final services PMI for June came in at 53 points, barely above initial estimates, leaving a narrow margin with the 50 point mark that separates, by construction, an expansion from a contraction in the sector. We therefore have the composite data (including industry), which came in at 51.9 (54.7 in May), the lowest in 15 months.

Chris Williams, Chief Business Economist at S&P Global Market Intelligence commented on the latest PMI figures: "The sharp slowdown in activity growth seen in June in the Eurozone raises the risk of a contraction in the region's economy in the third quarter. The June PMI is in line with a quarterly increase in GDP of only 0.2%, while the survey's forward-looking indicators, such as the new orders and business outlook indices, are also trending downwards, pointing to a decline in activity in the coming months. The manufacturing sector has already moved into contraction territory, with output falling for the first time in two years in June, while activity in the services sector has slowed sharply amid soaring inflation and a consequent rise in the cost of living."

"The latest PMI data therefore highlights a strong increase in the risks of economic contraction in the eurozone even as inflationary pressures ease but remain very marked," he adds.

"The uncertainties are obviously creating a great deal of volatility on the markets, but we can see that the discourse that is gradually becoming dominant is that of recession," notes Xavier Chapard (LBPAM). The recent decline in hydrocarbon prices only brings relative relief. And "it is indeed in Europe that the tensions on the energy market remain the most important. Indeed, in the face of the risks of even greater cuts to come from Russia, the price of gas has rebounded very strongly. These tensions are likely to persist, which will constrain European growth. The bad news has been amplified by strikes in Norway which could limit gas supplies," adds Chapard.

Right now, the pair is trading at $1.0199.

KEY CHART ELEMENTS

The spot is in the process of breaking a fragile neckline of a chartist pattern, which sends a clear bearish message. For the time being, our objective is to reach, with increasing volatility, the perfect parity of one Euro for one Dollar. If this is the case, a powerful rebound could eventually take shape.

MEDIUM-TERM FORECAST

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

Our entry point is $1.0202. Our bearish scenario price target is $1.0001. In order to preserve the capital invested, we advise you to place a protective stop at $1.0301.

The expected return on this Forex strategy is 201 pips and the risk of loss is 99 pips.