EUR/USD forms bearish flag as Eurozone economic rebound accelerates

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Jun 23, 2021
  • The EUR/USD pair has formed a bearish flag on the 4H chart.
  • Investors are reacting to the relatively dovish statement by the Fed Chair.
  • The pair rose after the strong Eurozone PMI numbers.

The EUR/USD pair tilted upwards after the relatively strong flash manufacturing, services, and composite PMI numbers from the Eurozone. The pair rose to 1.1950, which was about 0.90% above the lowest level on Friday last week.

EUR/USD
EUR/USD chart

Eurozone economic boom

Business activity in the Eurozone continued to improve in June as more countries continued to reopen. According to Markit, the Eurozone services PMI index rose from 55.2 in May to 58.0 in June. This increase was better than the median estimate of 57.8. It was also the highest it has been in more than 40 months. Similarly, the manufacturing PMI increased from 62.2 in May to 62.2 in June. In total, the composite PMI rose to 59.2 in June, the highest level in 15 years.

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Markit attributed the Eurozone rebound to the relatively strong demand from local and foreign buyers. At the same time, the average prices for goods and services rose at the fastest pace since 2002. Optimism among the business community rose, signalling that most of them will keep hiring and possibly hiking wages. The manufacturing PMI rose from 64.4 to 64.9 in Germany while it fell from 59.4 to 58.6 in France. In a note, Chris Williamson of Markit said:

“The data set the scene for an impressive expansion of GDP in the second quarter to be followed by even stronger growth in the third quarter.”

The EUR/USD is also reacting to the relatively dovish statement by the Federal Reserve chair on Tuesday. In testimony to Congress, Powell said that the Fed was prepared to do whatever it took to ensure that the economy performed well. Many analysts viewed this as a relatively dovish statement coming a few days after the Fed pointed to tightening in the coming years.

EUR/USD technical analysis

EUR/USD
EUR/USD technical chart

The four-hour chart shows that the EUR/USD pair has bounced back in the past few days. It has managed to move above the 61.8% Fibonacci retracement level. Further, the pair seems to be forming a bearish flag pattern, which is usually a sign of future declines. It is also below the 25-day and 50-day exponential moving averages, which is a sign that bears are still in control. 

Therefore, I suspect that the pair will resume the downward trend. If this happens, the next key level to watch will be last week’s low at 1.1845 followed by the 78.6% retracement level at 1.1825.

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