EUR/USD rebounds and is in positive territory after the publication of the US PMIs

• EUR/USD rebounds after the release of US PMIs, which came in at a lower than expected reading.
• EUR/USD overcomes earlier weakness driven by the HCOB Manufacturing PMI, which fell deeper into contraction territory.
• The pair has formed a bearish pennant price pattern that suggests the possibility of a sharp decline.

EUR/USD recovers from previous weakness after the release of lower-than-expected US PMI data, which calls into question US economic exceptionalism and weakens the Dollar US (USD) on Tuesday. The pair manages to shake off the damage from previous losses following the release of preliminary Eurozone Purchasing Managers' Index (PMI) data for April.

EUR/USD recovers after the release of US PMI data

The EUR/USD pair recovers and enters positive territory after the publication of preliminary data from the US S&P global PMI index, which showed readings lower than those expected by economists, weakening the US dollar. The S&P global manufacturing PMI also fell into contraction territory after reading 49.9, below the 50 that distinguishes growth from contraction. The result was considerably lower than the 51.9 in March and the 50.2 expected. The S&P Global Composite PMI stood at 50.9, up from 52.1 previously.

The S&P Global Services PMI fell to 50.9 from 51.7 in March and below the forecast of 52.0. Services data is especially important for the dollar, since this sector has been identified as the main cause of persistent inflation in the United States. This has led many investors to speculate that the Federal Reserve (Fed) will keep interest rates at high levels for longer than anticipated at the beginning of the year. Higher interest rates are positive for a currency, as they generate greater inflows of foreign capital.

However, the weaker-than-expected data could recalibrate the Fed's interest rate expectations, leading to a revival of bets that the Fed could begin cutting short-term interest rates. Following the release of the data, market indicators on the likelihood of the Fed cutting interest rates pointed to a first rate cut for September.

New home sales data for March, which was also released on Tuesday, likely provided support for the dollar as it exceeded expectations, up 8.8% versus negative 5.1% in February, and $0.693 million. of homes sold, compared to the 0.668 million expected and the previous 0.637.

EUR/USD falls after weak manufacturing PMI data

The EUR/USD fell early on Tuesday after the HCOB Manufacturing PMI release missed estimates, falling to 45.6 in April versus the expected 46.5 and 46.1 in March.

However, the Eurozone Composite PMI rose to 51.4, above the forecast of 50.8 and 50.3 in March. The rise was driven by the HCOB services PMI, which stood at 52.9 in April, above both the forecast of 51.8 and the previous 51.5.

Technical analysis: EUR/USD forms a bearish pennant

EUR/USD is trading in a rectangular range roughly at the same level as the 100-week simple moving average (SMA).

Taken in conjunction with the sharp decline that preceded the rectangle, the entire formation resembles a bearish pennant price pattern, which has bearish connotations.

EUR/USD 4-hour chart

A break below the April 16 low of 1.0601 would signal a likely activation of the price and the start of a decline.

According to technical tradition, the expected movement of a bearish flag is usually equal to the length of the “pole” or steep descent that precedes the formation of the box as the square of the pennant, or a Fibonacci ratio of the pole.

The 0.618 Fibonacci ratio of the extrapolated bearish pole provides the most reliable conservative target. This gives a price target at 1.0503. After that, the next concrete target is at 1.0446 – the October 2023 low. A decline of the same duration as the pole would take EUR/USD to 1.0403.

The RSI has broken out of oversold conditions, indicating new bearish potential.

For bulls, the resistance around 1.0700 will have to be overcome to have any hope of recovery. Next, the April 2 low at 1.0725 is the next upside target, followed by 1.0800, where a cluster of major moving averages coils.