Eurozone PMIs expected to improve further, but can they save the sinking euro? – Forex News Preview



The flash PMIs for June will be watched out of the Eurozone on Wednesday (08:00 GMT) as the bloc’s recovery gathers steam. The euro has been having a gruesome time of late despite the growing optimism about the economy, devastated not only by a more dovish European Central Bank but also by a resurgent US dollar. Can another set of upbeat PMIs provide some relief for the single currency, or does euro/dollar’s fate lie in the host of Fed speakers that are on the agenda this week?

Recovery going from strength to strength

After being overcome by fresh lockdowns at the start of the year, the euro area recovery is finally on a more solid footing, aided by a gradual reopening of the economy and underlined by a significant acceleration of the EU's vaccine rollout. While virus restrictions are unlikely to be lifted entirely anytime soon and there is the persisting threat of new variants setting back the fight against Covid, investors are increasingly confident about the Eurozone’s economic prospects.

The flash PMI estimates for June are expected to confirm this trend on Wednesday. The services PMI is projected to jump from 55.2 to 57.8 as declining virus cases allow more parts of the services economy to welcome back customers, particularly in the retail and hospitality sectors.

The manufacturing sector, however, could see some deceleration, with the PMI forecast to ease from 63.1 to 62.1. Nevertheless, having risen to record highs in each of the previous three months, moderately slower manufacturing growth will hardly be seen as worrisome. As for the composite PMI, it is expected to climb from 57.1 to 58.8 in June, which would point to a strong GDP rebound in the second quarter.

Euro bruised by monetary policy divergence

However, investors are already anticipating Eurozone growth to notch up a couple of gears in the current and next quarters so the data may not deliver much of a boost to the euro, which went into freefall last week. Euro/dollar is attempting a rebound on Monday after finding support in the $1.1855 region, which is the 23.6% Fibonacci retracement of the January-March downtrend.

The big tests for the pair to the upside are the 200-day moving average (MA) just below the $1.20 mark and the 61.8% Fibonacci of $1.21, which coincides with the 50-day MA. Conquering these key levels are critical if the pair is to maintain its bullish outlook. Though, with the ECB looking almost certain to begin tightening monetary policy after the US Federal Reserve, it will be difficult for euro/dollar to bounce back meaningfully. Thus, should the selloff resume soon and prices fall back towards the March trough of $1.1702, a new bearish phase could set in.

Fed speakers to matter more for EUR/USD

The US dollar is currently on rampage as Fed policymakers have brought forward the timeline of the first post-pandemic rate hike. The Fed will have multiple opportunities to either reinforce those expectations or backtrack on its hawkish rate path projections when several policymakers hit the virtual podium this week, the most prominent of which will be Chair Jerome Powell himself when he testifies before Congress on Tuesday.

If Powell and other Fed officials reiterate their concerns about higher inflation becoming sticky and do not downplay taper or rate hike talk, stronger-than-expected PMI numbers can at best soften the euro’s pain this week.

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