- The EUR/USD pair has shown a strong downward trend to approach 1.0670 after the release of weak German factory orders and Eurozone retail sales.
- US companies are suffering from the rise in interest rates by the Federal Reserve and the tight credit conditions of regional banks.
- The European Central Bank is expected to continue raising interest rates despite the decline in global demand.
The pair EUR/USD has experienced a vertical drop after retreating from 1.0733 in the early stages of the New York session. The EUR/USD pair has fallen to near 1.0670 after the release of weaker-than-expected German factory orders, Eurozone retail sales, and a bullish US dollar. The Euro-Dollar is expected to continue extending its decline.
S&P 500 futures hold nominal losses late in London trading. US stocks were offered slightly on Monday after the release of bearish US services PMI reported by the agency’s Institute for Supply Management (ISM).
The general mood in the markets is one of extreme caution, as weak US economic activity has raised hopes of a coming recession. However, Goldman Sachs has shared differing views on the US recession. The investment banking giant has cut the probability of the US economy entering a recession to 25%, from 35% previously. As reported by Bloomberg, the catalysts for the US recession are the strength of the labor market and the improvement in business sentiment.
Meanwhile, the Dollar Index (DXY) has extended its resilient rally to near 104.26 despite mixed signals on June monetary policy from the Federal Reserve (Fed). Looking ahead, the lack of US economic indicator releases would keep all attention on macroeconomic developments.
By contrast, demand for US government bonds has risen ahead of the vote on the US debt ceiling bill in Parliament. This has caused the 10-year US Treasury yield to fall to around 3.68%. A Reuters poll showed that neither US President Joe Biden’s Democrats nor congressional Republicans emerged clear winners in the battle to raise the $31.4 trillion debt ceiling.
Mixed responses to Federal Reserve policy
The question of whether the Federal Reserve will raise interest rates in June or keep monetary policy stable has continued to be the talk of the press. And now the release of the weak US services PMI on Monday has added to the uncertainty.
On Monday, the US ISM Services PMI managed to miss the 50.0 threshold that separates the border between boom and bust. The services PMI for May came in at 50.3, versus the consensus 51.5. This indicates that the economic indicator has barely defended the contraction phase and that a slight expansion is being registered in the activity of services.
Last week, the US manufacturing PMI contracted for the seventh consecutive month. It is very likely that the joint effect of the contraction in manufacturing activity and the slight expansion in service activity could push the US economy into recession.
It appears that companies in the US region are facing the wrath of the Federal Reserve’s interest rate hike and tight credit conditions from US regional banks, which has caused their productivity to decline. general.
On the other hand, the number of new entrants to the labor market is growing significantly each month, which could keep consumer spending at high levels and accelerate demand-driven inflation. Therefore, opinion is divided on the Federal Reserve’s interest rate policy stance for June.
Euro Faces Pressure Following Weak German Factory Orders and Eurozone Retail Sales
The economic indicators belonging to the Eurozone published early in the London session have uncovered its economic conditions. The Deutsche Bundesbank reported a contraction in monthly factory orders of 0.4%, while an expansion of 3.8% was anticipated. Annual factory orders contracted significantly by 9.9% versus estimates of 8.4% contraction.
Also, Eurozone retail sales (April) put up a poor show. Monthly retail sales remained stagnant, while an expansion of 0.2% was expected. Annual retail sales contracted 2.6% against expectations of -1.8%. Weak spending and factory orders, which indicate future demand, indicate that overall demand in the economy is losing its resilience, putting more pressure on inflation going forward.
Despite the contraction in activity, the European Central Bank (ECB) is expected to continue raising interest rates to control inflation. The president of the European Central Bank (ECB), Christine Lagarde, reiterated on Monday that the pressure on prices remains strong in the euro zone.
Nomura economists expect the European Central Bank to raise rates two more times from now, ie 2 25 basis point hikes in June and July for a terminal rate of 3.75%. Thereafter, assuming core price momentum has slowed sufficiently, we believe the ECB could end the rally cycle.
EUR/USD Technical Outlook
The EUR/USD pair has pulled back after a mean reversal and has approached the 89-period EMA at 1.0758 on a four-hour scale. The pair is expected to retrace from the March 15 low at 1.0516 to the April 26 high at 1.1095.
Investors could see bearish momentum if the RSI (14) falls within the 20.00-40.00 bearish range.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
