EURUSD – bears are back

On a previous Monday we wrote that the market was up for some corrective up-tick but was likely to be back in a bearish mode in a medium term. Indeed was saw an upside correction on the EURUSD that lasted for a bit longer than 4 days and on Friday bears returned convincingly showing their intentions.

Among triggers of another selling wave on the pair were:

• Downgrades: Fitch cut Greek rating from BB+ to B+ and S&P lowered outlook for Italian A+ to negative from stable; Italian rating is actually a major concerns here as it fans contagion concerns
• worries that local elections in Spain may unveil some hidden debt 
• worries what will happen if the ECB stops accepting Greek bonds as a collateral (in the event of restructuring; even the soft one…)
• macroeconomic data do not help either – soft-patch worries are related to the US economy but for as long as they increase risk aversion euro is exposed

Technically, a selling signal on the EURUSD came as the pair brought through a lower limit of an upward wedge formation (typical formation in a corrective phase) after being unable to move above a key 1,4340 level. The pair was quick to move towards multi-week lows and is about to test 1,40 with target supports (for a possible wave c) at 1,3870 and 1,3745.

The euro isn’t loosing merely versus the dollar. We saw some major moves against the franc, pound and yen as well, with EURCHF searching for all-time lows.

If the last year offers any lesson, euro may fall until some bold decisions on Greece are not taken and those still seem to be some few weeks away.

Chinese PMI declines

The week didn’t start well with the Chinese flash PMI declining from 51,8 to 51,1 pts. This is yet another decline in activity in China and may rise concerns how Chinese economy will respond to tightening measures – those already introduced and those yet to come. Chinese officials made it clear that the inflation was a priority and comparing to 2007 they are still behind the curve. That means the Chinese economy is likely to face the impact of a significant tightening and a consensus that the GDP growth will remain broadly unaffected might be too optimistic. In context of weaker US data and renewed concerns in Europe this news is definitely negative for industrial commodities and equities.  

Events to watch – flash PMIs

The week will bring some relevant data from the US (durable orders, preliminary GDP, new home sales) and some intangibles from Europe (mostly regarding Greece). European flash PMIs will be released today (3.58 ET, 9.58 CET; industrial PMI is expected at 57,5 pts. and services PMI at 56,5 pts.).   

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
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