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Abstract: After a sharp decline in March, industrial output in the eurozone was better than expected in April. Due to the fall in energy prices and the lifting of supply chain bottlenecks, industrial output in the eurozone improved in early 2023, but the reversal in March cast a shadow over the prospects, indicating that interest rate hikes may be inhibiting investment.

Fundamentals

Data released on Wednesday showed that industrial production in the eurozone rebounded better than expected in April, as the output of production means such as construction and equipment increased greatly, offsetting the impact of the decrease in consumer goods production.

According to Eurostat, the output of means of production jumped by 14.7% in April after plunging by 15.2% in March, which was enough to compensate for the 2.6% decline in the output of durable consumer goods and the 3.0% decline in the output of non-durable consumer goods. The output of production means is also the main driving force for the annual growth of industrial output, offsetting the sharp decline of intermediate products, energy, and durable consumer goods.

The growth of industrial output in the eurozone in April was based on the strong growth of Ireland, but without Ireland, the output in the eurozone declined slightly for the second consecutive month. The overall increase of 1.0% is not enough to offset the 3.8% month-on-month decline in March, and the output is still about 3% lower than that in February. Output in the eurozone may weaken further because the manufacturing PMI will also perform poorly. With the tightening of monetary policy and the weakening of foreign demand dragging down output, the industry in the eurozone will struggle further this year.

In May this year, the manufacturing PMI of the eurozone further fell below 50.0, while the updated data showed that the eurozone economy suffered a winter recession in the fourth quarter of last year and the first quarter of this year. However, due to the high inflation rate in the eurozone (6.1% in May) and the record tension in the labor market, it is expected that the European Central Bank (ECB) will raise interest rates to 3.5% at its meeting on Thursday, which may bring further pressure to the eurozone industry.

After the Federal Reserve and the ECB decided on interest rates this week, the EURUSD may fall slightly. Because although the Fed may keep interest rates unchanged, its wording should support the market's pricing of future interest rate hikes; Although it seems that the ECB will raise interest rates by 25 basis points on Thursday, it may be more difficult for it to convey hawkish messages after inflation and economic growth data weaken. The meeting between the Fed and the ECB should make the EURUSD fall back to close to 1.0700 in a short time and then continue to rise.

Technical Analysis

The EURUSD has been undergoing a downward revision since it hit a 13-month high of 1.1095 at the end of April. The EURUSD fell below its 50-day, 89-day, and 100-day SMAs and the upward trend line connecting its lows since September 2022, and its recent rebound momentum is accelerating, intentionally testing the D point of the butterfly pattern.

Momentum indicators reflect a strong bullish trend. Specifically, the stochastic oscillator is rising sharply around its overbought zone of 80, while the RSI is slightly above its neutral threshold of 50, trending further higher.

If the positive momentum is further enhanced, the threshold of 1.0790 may become the first obstacle for bulls to clear. Breaking through this level, bulls may test the 50-day SMA, which is currently 1.0880.

Alternatively, the bearish move could bring the price very much back to the threshold of 1.0700 and then pave the way for a continued test of the recent low at 1.0633.

Overall, although the bears are still in control of the market, the bulls still seem to be struggling to recover some of the lost ground. For this reason, the EURUSD needs to decisively break above its 50-day SMA before it can establish its position in the future. It is recommended to go long upon the pullback according to the pattern.

Trading Recommendations

Trading direction: Long

Entry price: 1.0800

Target price: 1.0998

Stop loss: 1.0700

Deadline: 2022-06-28 23:55:00

Support: 1.0795, 1.0774, 1.0733

Resistance: 1.0849, 1.0873, 1.0884