The Euro is trading lower against the US Dollar after the latest Chicago Purchasing Manager’s Index and Consumer Sentiment data showed that confidence levels and manufacturing activity in the US is lower than markets had initially anticipated. This, counter-intuitively, perhaps, led to strength in the US Dollar (and weakness in the Euro) as investors fled into safe haven assets on the short term negative outlook. This brought down the Euro and high yielding assets (such as the Australian and New Zealand Dollars) into the last trading day of the quarter.
Looking at the Chicago PMI data, the numbers were significant because the business barometer showed a contractionary figure for the first time in three years, coming in at 49.7 (versus the 53 number that was expected). This is down sharply from the 53 reading that was seen in the previous report, and this led to the latest bear moves as numbers below 50 indicate a contractionary environment is in place. This led to a reversal in the European currency after previous attempts higher stemming from positive news out of Spain. This news showed that Spain is willing to tailor its 2013 budget plans in order to meet the demands of the Eurozone funding countries, and this suggests a greater level of economic stability in the region going forward.
Assessing Sentiment Going Forward
Looking ahead, there are some conflicting arguments for which over-riding factors will have the greatest influence on the Euro price performance for the remainder of this year. On the positive side, we have analysts suggesting that the worst of the Eurozone debt dilemma is behind us. The latest piece of evidence supporting this argument can be seen in the fact that the framework for the 5th Spanish austerity package has been laid out (with its latest budget requirements being met). If these factors wind up being the driving factor in the Euro, the July lows near 1.20 will likely be confirmed as the long term bottom in the currency.
The other side of the argument comes from analyst arguments suggesting that most of the post-Summer optimism in the markets has come as a result of stimulus proposals, rather than solid economic data, and that this type of optimism can only sustain itself for limited periods of time. Proponents of the bearish side of things will need to look closely at economic data releases and corporate earnings results in order to gain confirmation that the latest rallies are ripe for downside retracements.
The rally in the EUR/USD seen since July has come off in the last two weeks, with prices now hitting the 23.6% retracement of the rally from 1.2040. There is scope for further losses, however, as much better support rests at 1.2735, which is the confluence of the 38.2% Fibonacci level and the 100 day EMA. Indicator readings are starting to look bearish as well, with the MACD rolling over and the RSI crossing into negative territory. Preferred strategy is to wait for a drop to 1.2735 before new buy enteries are considered.