EUR/USD fails at $1.10, sinks lower

EUR/USD fails at $1.10, sinks lower
  • The PMI data comes in better than expected, signalling a bounce in business activity
  • ECB reiterates the readiness to increase the size and extend the length of its PEPP
  • The EUR bulls fail at $1.10 once again, paving the way for a change in the trend direction

EUR/USD has failed to clear $1.10 for the second time this month, signalling a potential reversal in the trend direction. Separately, JP Morgan has issued a warning that the currency debasement is coming to the markets.

Fundamental analysis: Positive PMI numbers

The latest PMI data from Europe have shown that the data is improving, but staying within the contraction zone. The manufacturing PMI came in at 39.5, much better than 33.4 in April and 38.0 expected from the surveyed analysts. In addition, the services PMI increased to a three-month high of 28.7 from the previous 12.0.

“The eurozone saw a further collapse of business activity in May but the survey data at least brought reassuring signs that the downturn likely bottomed out in April,” said Chris Wiliamson of IHS Markit.

Separately, Philip Lane, who serves as the ECB board member, said it looks clear now that the current quarter represents the trough of the crisis. However, all scenarios developed by the ECB point towards a deep recession.

“In terms of quarterly performance, a significant rebound is expected over the summer in line with the removal of the most severe lockdown measures. However, the scenarios differ in terms of the duration and severity of virus-related restrictions on economic activity and the behaviour of households and firms in the rest of 2020 and throughout 2021,” wrote Lane.

Given the scale of the crisis, Lane reiterated that the ECB is ready to increase the size and extend the length of its “Pandemic Emergency Purchase Programme (PEPP)”.

Technical analysis: EUR bulls fail at $1.10

After three days of rallying higher, the EUR buyers have failed to sustain the positive momentum today after testing the $1.10 handle for the second time this month. The price action closed above the 100-DMA yesterday, which launched the EUR towards the 200-DMA above $1.10 today.

EUR/USD daily chart (TradingView)

“Part of the decline is weakness in risk appetite on US-China worries but this is largely a technical move. For the second day, EUR/USD failed to hold gains above the 1.1000/20 range of tough resistance and now the sellers have gained the upper hand,” wrote analyst Adam Button.

A daily close below $1.0965 would be very negative for the buyers as today’s rally would be classified as a failed breakout. This is likely to invite more selling into the weekend with the sellers looking to push back the price to the low $1.08s.

Summary

EUR/USD has failed once again to move above $1.10 on a regular basis, which marks the second failure this month. As a result, the sellers may force the price action below $1.09 once again.

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