As we roll into Tuesday’s North American session, the theme of broad U.S. dollar strength and continued weakness in the euro is taking the fore once again. After EUR/USD bulls were able to stem the bleeding late last week, today’s Markit Service PMI earlier today reopened the bulls’ wounds.
On a headline basis, the Eurozone’s composite PMI improved slightly to 53.8 from 52.8 in June, but this headline reading masked some major concerns beneath the surface. For one, the reading from Italy, the region’s third-largest economy, dropped to just 52.8 vs. expectations of 54.0; the measure in France, the second-largest economy, was hardly more inspiring.
More concerning, the service output price index for the Eurozone as a whole fell to just 48.5, indicating outright deflation in service prices. Back in June, the European Central Bank introduced a raft of new policies to try to stave off deflationary pressures, but thus far, the impact of these developments has been minimal. While the ECB is unlikely to take any additional action at its meeting on Thursday, ECB President Draghi may be forced to acknowledge the disappointing data in his accompanying press conference.
Technical View: EUR/USD
If anything, the technical view is even more dire than the fundamental outlook. The EUR/USD has been in a persistent downtrend since peaking at 1.40 back in May, and bulls were not even able to take the pair 80 pips higher last week before the sellers have stepped in again today. This shallow bounce, which only equates to a 23.6% Fibonacci retracement of July’s leg lower, suggests that the sellers remain firmly in control of trade.
The secondary indicators also support this view. The MACD continues to trend lower below its signal line and the “0” level, showing strongly bearish momentum, whereas the RSI is extremely around the 30 level. While the RSI is flirting with oversold territory, the EUR/USD may need to reach a strong support level before forming any sort of sustainable bounce.
The current year-to-date low sits at 1.3366, but if that potential support level is broken, bears will start to turn their eyes to the November 2013 lows around 1.3300 next. On a bigger picture basis, the 38.2% Fibonacci retracement of the 2012-2014 rally (not shown) comes in at 1.3247. Meanwhile, the medium-term bias will remain to the downside as long as rates stay below previous-support-turned-resistance at 1.3500.