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Abstract: According to data from Germany and the European Union, the PMI of the service industry fell to the contraction range below 50 in August, which put heavy pressure on the EUR. After the data was released, the EURUSD fell to around 1.0800, the lowest level since mid-June. The market is waiting for the U.S. PMI survey.

Fundamentals

The manufacturing PMI of the eurozone rose from 42.7 to 43.7 in August, higher than the expected 42.8. However, the service industry was hit, and the PMI fell to a 30-month low of 48.3, the first contraction since December. As a result, the comprehensive PMI fell to 47.0, the lowest level in 33 months since April 2013. After the data was released, the EURUSD fell by 0.45% in the day and is now reported at 1.0804.

Today's PMI data shows that the two largest economies in the eurozone are deteriorating rapidly, and the service industry is entering a deep recession following the manufacturing industry. Private sector activities in Germany and France have shrunk more than expected. Enterprises in these two countries have seen a weakening of demand and reported a reduction in the backlog of orders. It is expected that there will be more troubles in the future.

The August PMI in the eurozone further put pressure on the EUR, indicating that the speed and scope of economic deterioration are faster than previously thought. For the EUR, the cyclical impact of these data is obviously negative. The European Central Bank (ECB) faced an arduous task at its meeting in September, because "very intractable" core inflation and wage pressure required further interest rate hikes, but weaker economic activity data showed the opposite. This result further proves that shrinking global demand, high inflation, and the aggressive monetary tightening cycle of the ECB are having an impact on the economy.

For this reason, investors bought German government bonds in large quantities, which caused the yield of 10-year German government bonds to plummet by 9 basis points to 2.56%, while investors drastically reduced their bets on interest rates. At present, it is considered that the possibility of the ECB raising interest rates by 25 basis points is 60%, compared with the previous expectation of 80%. This strengthens those who advocate suspending interest rate hikes in September.

However, investors should not ignore additional market signals. Lagarde, President of the ECB, has warned that the economy may face rising wages and declining productivity, leading to higher inflation. These fears seem to be coming true soon; Therefore, the ECB may be even more reluctant to suspend the interest rate hike cycle in September.

Technical Analysis

The EURUSD started a new round of decline from the 1.0930 level. Further selling momentum in the EURUSD accelerated after the release of the Eurozone August PMI; as previously analyzed, the EUR broke below the 1.0910 support level to enter a bearish range.

The EURUSD is now edging closer to the key support level at 1.0800, which is meanwhile supported by the key 200-day SMA at 1.0797.

Further pullbacks could touch the last line of defense for the uptrend at 1.0760, and if that support fails to hold the downward momentum, bears could continue to push prices down to the May 31 low of 1.0635.

If the bulls regain the upper hand in the 1.0760 range, the EURUSD is expected to test the 55-day SMA at 1.0961 ahead of the psychological level of 1.1000 and the August 10 high of 1.1064. Once the level is cleared, spot prices could return to the integer threshold of 1.1000.

On the whole, although the EURUSD is facing some weakness in the short term, relying on the complete continuation of the upward structure, it is not a bad thing to rise again after briefly testing the downward support. It is recommended to buy the dips against the upward support.

Trading Recommendations

Trading direction: Long

Entry price: 1.0770

Target price: 1.0979

Stop loss: 1.0650

Deadline: 2023-09-06 23:55:00

Support: 1.0787, 1.0760, 1.0734

Resistance: 1.0825, 1.0873, 1.0930