EUR/USD forms head & shoulders as EU heads to another recession

Written by: Crispus Nyaga
January 22, 2021
  • The EUR/USD has formed a rising wedge and a head and shoulders pattern.
  • Data by Markit showed that the services PMI declined to 45.0 in January due to lockdowns.
  • The manufacturing PMI dropped to 54.7.

The EUR/USD rose on Friday even after the relatively weak manufacturing and services PMI numbers from the Eurozone. It is trading at 1.2165, which is slightly lower than the year-to-date high of 1.2355.

EUR/USD price action

Eurozone double-dip recession?

The European Union had a weak start of the year, according to the flash PMI data released by Markit. 

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The services PMI declined from 46.4 in December to 45.0 in January as more countries went into lockdown. While this reading was better than the estimated 44.5, it was below the expansionary zone of 50. The PMI dropped to 46.5 in France and 46.8 in Germany.

The manufacturing sector was not spared either. In total, the Eurozone manufacturing PMI dropped to 52.9 in January from 57.5 a month earlier. The median estimate by a panel of economists was for the PMI to come in at 54.5. In total, the composite PMI fell to 54.7.

These numbers show that the Eurozone economy could be heading towards another contraction in the first quarter. That is after its third and fourth-quarter recovery. In a note, analysts at Markit said:

“A double-dip recession for the eurozone economy is looking increasingly inevitable as tighter COVID19 restrictions took a further toll on businesses in January. Output fell at an increased rate, led by worsening conditions in the service sector and a weakening of manufacturing growth.”

Notably, the weak numbers came as forex traders were digesting the decision by the European Central Bank (ECB). The central bank left all its policy frameworks unchanged and expressed hope that the vaccine will lead to recovery. It left its main rate at -0.25% and pledged to continue with its 1.35 trillion euros quantitative easing policy. 

Meanwhile, early this week, Eurostat also released weak European consumer price index (CPI) data. The bloc’s consumer prices rose by 0.3% in December, which is lower than the ECB’s target.

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EUR/USD technical outlook

EUR/USD technical chart

The EUR/USD has been in an upward trend this week partly due to the weaker US dollar. On the four-hour chart, the 25-period and 15-period EMAs have made a bullish crossover. In most cases, this is usually a bullish signal.

However, pulling the pair back shows that it has formed a head and shoulders (H&S) pattern. The H&S is usually a bearish pattern, which means that the pair could soon break below the neckline at 1.2057. Providing further evidence is the fact that the EUR/USD has formed a rising wedge pattern. You can use our free forex trading courses and a free demo account to learn more about these patterns.