EUR/USD rally runs out of gas as EU manufacturing crawls back to growth

EUR/USD rally runs out of gas as EU manufacturing crawls back to growth
  • The EUR/USD rally eased after relatively weak manufacturing PMI data from the eurozone.
  • The EU manufacturing PMI rose from 33.4 to 36.6 as companies returned back to work.
  • Technically, the EUR/USD pair will attempt to test the 61.8% retracement at 1.1170

The EUR/USD pair pared earlier gains as investors reacted to relatively weak manufacturing PMI data. The pair is trading at 1.1135, which is slightly below the day’s high of 1.1150.

EUR/USD rally eases

EUR/USD reacts to manufacturing PMI data

The manufacturing is an important component of the eurozone economy. According to the statistics office, the sector contributes about 25 per cent to the total GDP.

The region’s manufacturing activity remained in contraction territory, according to the latest data by Markit. The manufacturing PMI rose from the previous 33.4 to 36.6. As such, while the data showed some improvement, it also means that the sector contracted. The sector has been in contraction mode since February 2019.

According to Markit, the improvement observed in May was mostly because of the easing of travel by most countries in the region. However, manufacturers continued to face significant challenges, including contractions in orders and output and internal and external demand. As a result, they continued to reduce their workforce sharply, with France, Spain, and Germany being the most affected.

At the same time, the region continued to observe deflationary pressures, as we pointed last week. Input costs declined for the twelfth consecutive month.

On a positive side, many manufacturers remained optimistic about the future. Confidence rose to a three-month high, which was possibly attributed to the recently passed $826 billion stimulus package. In a statement, Chris Williamson of Markit said:

“The manufacturing downturn looks to have bottomed-out in April, with production falling at a markedly slower rate in May. The improvement in part merely reflects the comparison against a shockingly steep fall in April, but more encouragingly was also linked to companies restarting work as virus lockdowns were eased.”

Germany manufacturing activity struggle

The eurozone PMI data came shortly after Markit released the data from Germany. These statistics showed that the region’s manufacturing activity continued to struggle in May, with the PMI coming in at 36.6. Analysts polled by Reuters were expecting the PMI to come in at 36.8. The number was a few points above the 11-year low of 34.5.

In the statement, Markit said that German manufacturers continued to report low output because of weak local and foreign demand. Backlogs across the sector declined and confidence among manufacturers also dropped. Similarly, the purchases of raw materials and semi-manufactured goods fell sharply in May. In a statement, Phil Smith of Markit said:

“Manufacturing production was already down 7-8% from a peak in late-2017 even before the onset of the pandemic, and now that figure looks to be in the region of 25-30%. With production as far as it is below capacity and manufacturers not expecting a full recovery anytime soon, factory job losses have continued to accelerate.”

EUR/USD technical outlook

EUR/USD technical analysis

The EUR/USD pair is trading at 1.1135. On the daily chart, the pair has been on an upward trend for the past five days and is now a few inches below the 61.8 per cent retracement level. The price is slightly above the 100-day and 50-day exponential moving averages. The momentum indicator has continued to rise, which means that the price may continue rallying as bulls attempt to test the 61.8% retracement at 1.1170.

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 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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