EUR/USD: Economic and Technical Divergence Signals Further Decline
The EUR/USD currency pair experienced a downturn on Friday, reaching a five-session low, as varying economic data and technical signals indicate ongoing downside risks. The Eurozone’s June HCOB PMI fell short of forecasts, while the US S&P Global PMI surpassed expectations, resulting in a lower EUR/USD for both the session and the week. The spread between German and US bond yields widened, with stronger US PMI data boosting US yields and supporting the dollar. By late trading in New York, EUR/USD had declined by 0.10%, fluctuating between 1.0678 and 1.0697. The US dollar strengthened amid a rally in USD/CNH towards 7.2920 and losses in commodities, driving investors to the safety of the US dollar.
Significant upcoming economic data, including US weekly jobless claims and May PCE, are anticipated to pose substantial risk factors for EUR/USD in the coming week. In Europe, business growth in Germany, France, and the Eurozone decelerated sharply in June, with the French services PMI slipping into contraction and Germany’s manufacturing contraction worsening. This economic decline is likely to increase speculation about ECB rate cuts, as shown by the rising Euribor futures prices, and may impact the upcoming elections in France, potentially adding to regional uncertainty.
Technical indicators point to a bearish outlook for EUR/USD. Declining RSIs suggest continued downward momentum, and the pair trading below the 10-day moving average (DMA) reinforces this view. The daily and monthly RSIs are not yet in oversold territory, indicating room for further decline. The widening German-US two-year yield spread, currently near -194 basis points, is correlated with EUR/USD and is nearing the June 17 peak. Continued poor economic data and yield spread widening could further pressure EUR/USD downwards. Should EUR/USD break below April’s low, it could trigger stop-loss selling and potentially lead to a test of the 1.0450/1.0500 zone.
