EUR/USD chokes as EU faces steep recession: US retail sales ahead

EUR/USD chokes as EU faces steep recession: US retail sales ahead

  • The EUR/USD is under pressure as the European economy continue to deteriorate.
  • Data from Eurostat showed that the EU economy contracted by 3.8% in Q1.
  • The region's trade surplus expanded but the volume of trade declined in March

The euro was under pressure today as the market reacted to the weak economic growth numbers from Europe. The EUR/USD pair dropped by about 10 basis points while the EUR/GBP pair rose slightly. The euro index declined by about 0.10%.

Euro index
Euro index under pressure

European economy contracts in Q1

Europe has been among the most affected continents by the coronavirus pandemic. The region has lost more than 80,000 people and some of its most vulnerable economies have been in a freefall.

According to Eurostat, the eurozone’s economy contracted at an annualised pace of 3.1 per cent in the first quarter. It shrunk by 3.8 per cent quarter on quarter.

According to the office, these were the worst numbers ever recorded by the bloc since 1995. In Germany, data from the statistics office showed that the economy contracted by 1.9 per cent year on year and by 2.2 per cent QoQ. Also, this was the worst reading ever.

The worst-performing countries in Europe were Italy, Spain, Portugal, and Czechia, whose economies declined by 4.7%, 5.2%, 3.9%, and 3.6% respectively.

It is easy to see why Europe contracted. In the first quarter, many countries in the region started seeing more cases of the coronavirus disease. This led to lockdown in countries like Italy and Spain. In the final month of the quarter, other countries like Germany and France implemented their own lockdowns.

As a result, all industries have been on a downward trend. The manufacturing and services PMI has fallen to the lowest level in history. The same is true with the real estate and retail sectors.

The numbers from Eurostat showed that the number of employed people fell by 0.2 per cent in the region. This was the first time it declined since 2013

Another data released today showed that the region’s trade surplus grew to 22.2 billion euros in April. This was a 6.2% decrease from March. The surplus happened because imports declined by 10.1% to EUR 183.5 billion while exports fell by 6.2% to EUR193 billion. Trade within the bloc also fell by 12.1%.

Euro under pressure

The EUR/USD has been on a downward trend for several reasons. First, the EU member states have disagreed sharply on the next phase of funding for the region. In a meeting last month, the leaders failed to agree on the right amount and how the funding should be structured. Some wealthy members insisted that the funds needed to be in form of a loan. Other southern states said that they wanted the funds in the form of grants.

Second, analysts expect the region to recover more slowly than other countries. Indeed, some have argued that another euro crisis is bound to happen in the next few years.

Third, a German court asked the government to assess the quantitative easing program. In the ruling, the judge said that he could block further QE purchases by the ECB. This ruling puts a risk the main monetary policy mechanism of the ECB at risk.

Also, the Brexit disagreements are a significant risk for the region.

EUR/USD technical outlook

EUR/USD
EUR/USD technical outlook

On the two-hour chart, the EUR/USD is trading at 1.0820, which is slightly higher than yesterday’s low of 1.0775. This price is between the 23.6% and 38.2% Fibonacci retracement level and along the 50-day exponential moving average. I expect the price to continue rising ahead of the US retail sales data that will be released later today.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.

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