The euro can be both pleasant and unpleasant. It rises, reaching yearly highs against the US dollar, and then falls sharply, reigniting concerns about the return of EUR/USD to parity. Such is life in Forex. Peaks are followed by lows. Bottoms are replaced by new highs. These movements are driven by disappointments and pleasant surprises. In May, the main currency pair encountered a rough patch.
The most significant decline in European PMI in the manufacturing sector since factories were shut down three years ago due to the pandemic hit EUR/USD like a bucket of cold water. The PMI dropped to 44.6. Its dynamics cast doubt on the European Commission's forecast of a 0.4% GDP growth for the currency bloc in the second quarter.
The dynamics of the eurozone PMI
Unfortunately, the alarming signals from Germany have been confirmed. The economy is disappointing, casting doubt on the recovery of the uptrend in EUR/USD. It couldn't get any worse. The trend could even reverse. If in April it was said that only the US economy was heading towards a recession, now the eurozone is facing the same problem. Add to that the sluggish recovery of China, and the situation begins to resemble global stagflation. Inflation remains high while economic growth is rapidly slowing down. Is it time to flock to the US dollar?
That's exactly what investors are doing. And the EUR/USD bears should not thank the US debt limit issue, but the hawks at the Federal Reserve and the worsening condition of the European economy. After Fed Chairman Jerome Powell and his colleagues spoke, the market is increasingly convinced that the central bank will pause the process of monetary tightening in June and then resume the cycle in July. The chances of a rate hike in mid-summer have jumped to 39%.
Chances of the Fed maintaining or changing rates in July
Thus, the European economy is disappointing, while the American economy appears more resilient to the Fed's most aggressive monetary tightening in decades. As a result, the European Central Bank may slow down the rate hike process, while their counterparts in Washington are capable of raising borrowing costs even higher. Back in April, the market was confident in the end of the cycle and openly discussed a dovish pivot! How quickly the scenery changes in Forex! Should we be surprised by talks of breaking the uptrend in EUR/USD?
Technically, this is confirmed by the formation of the "Splash and Shelf" pattern. The trend line of the initial stage has been breached, which shows the bears' intentions. If the main currency pair doesn't find the strength to return to the fair value range of 1.0865-1.1085 in the near future, the risks of a significant change in the uptrend will increase significantly.
In such conditions, we should stick to the strategy of building short positions on EUR/USD from levels of 1.101 and below. The target levels are set at 1.066 and 1.053.