EURUSD Falls 1% as Bulls Retreat
05 October 2022
It looks like the cheerful sentiment has not lasted for long, and bears regained control of the market, pushing the single currency down more than 1% on Wednesday.
US equity indices were also down today, while US yields jumped simultaneously, implying the medium-term downtrend in risk assets could continue today.
Weak EU macro data
Final business activity estimates for the euro zone were poorer than anticipated and point to a further decline in economic activity. From 48.9 a month earlier, the composite index decreased to 48.1 in September. Values below 50 show that following April's growth peaks, the euro zone's economies have dropped from sluggish growth to shrinking economies.
EUR/USD has shifted to the downside and dropped below 0.9950 today. Rabobank economists predict that this quarter, the pair will decline to 0.95.
"Although it is clear that the Eurozone is facing a difficult winter, in our view, the EUR is not yet fully priced for the energy price crunch facing the region given the risk that it could extend for several years. This could potentially make a production from some industry groups untenable for Europe on a one-to-five year horizon," they added.
Relief rally over?
From the short-term perspective, the EURUSD pair has failed at parity and is about to break down from the upward channel, with the trendline of that channel currently being tested near 0.99.
If that level is not defended, we might see further decline toward previous short-term lows at 0.9750.
This week's relief rally could fade quickly since there have been no new optimistic developments in the global macroeconomic environment.
On the upside, bulls must retake the 0.99 level in order to attack parity again. From the medium-term perspective, jumping above 1.0 is critical to start a meaningful bounce.