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Summary: Friday's PMI data has cost the Eurozone almost all confidence and the market is in desperate need of an improved economic outlook. The EURUSD is likely to be stuck in a narrow range for a longer period of time. For now, EURUSD continues to be closely tied to short-term interest rate expectations, and the PMI data has certainly had an impact on those expectations.

Fundamentals

Data released on Friday showed that the Eurozone services PMI decline was particularly severe, indicating that the continued high growth in labor costs and the tightening monetary environment against the economy's growth has begun to have an impact. If these adverse factors do have an impact, doubts may arise about the extent of the Eurozone's recovery from the winter recession in the second quarter.

Meanwhile, the manufacturing sector continues to face factors such as weak demand, sluggish capital goods orders, and a shift in demand from goods to services. As the services sector accounts for over 70% of economic output, if the decline in services proves to be temporary, a growth trajectory could still be realized despite manufacturing weakness.

Preliminary data for June in the Eurozone indicates a further slowdown in inflation, which may prompt investors to reduce their bets on an interest rate hike by the European Central Bank to some extent and potentially harm the euro. However, given the ECB's explicit intention to further hike interest rates, investors are unlikely to bet on a complete reversal of the euro, especially if U.S. personal consumption expenditure data confirms expectations of only one more rate hike by the Fed.

Since the sell-off in early May, EURUSD's upward momentum stopped in the supply zone around 1.1010 and then fell below 1.0900, indicating a lack of follow-through buying and prompting more buyers to close their positions.

The bullish SMA crossing at 1.0810 in the daily chart is the main level to measure further gains for the bulls. A close above the new resistance level of 1.0930 is necessary to ease the selling pressure. Otherwise, any further correction could push EURUSD to the 1.0700 level. If the significant correction from last Friday is seen as a turning point, the euro could return to levels unseen in over a year.

Technical Analysis

After last Friday's 0.85% decline, the short-term uptrend that started in early June appears to be facing a stall. The trendline that slanted upward since September 28, 2022, has served as strong resistance, pushing the euro against the US dollar closer to the 50-day SMA at 1.0874. The current adjustment may also be a result of the bearish divergence formed between the stochastic oscillator and the recent price action of the EURUSD pair. However, with Monday's upward adjustment, we believe that the decline initiated last Friday was merely a temporary anomaly.

Currently, the remaining momentum indicators seem more balanced. The average directional movement index (ADX) is rapidly approaching 25 and rising swiftly, indicating that the bulls will regain their bullish confidence. Similarly, the RSI is slightly above the 50 midpoint. However, the stochastic oscillator is attempting to fall below the overbought zone, a move that clearly opens the door for a significant adjustment.  

If the bears want to capitalize on various bearish signals, they must first clear the 1.0874 level and test the support zone set between 1.0711 and 1.0809. This zone is defined by the high point on December 15, 2022, the 100-day moving average, and the 23.6% Fibonacci retracement level of the uptrend from September 28, 2022, to April 26, 2023. Even lower, they would have a chance to push EURUSD to a busier 1.0532-1.0571 range.

On the other hand, bulls are interested in keeping the pair above 1.0874 to stop the current adjustment. They will then attempt to retest the range between 1.1032 and 1.1095, composed of the highs from February 2, 2023, and April 26, 2023. If successful, they could set a new high for 2023 and potentially set their sights on the unseen high of 1.1184 from over a year ago.

Overall, EURUSD bears are attempting to capitalize on the formed bearish divergence and initiate a significant downtrend that eventually breaks below the recent low of 1.0634. However, Friday's decline is more of a bullish retracement as the market completes the "bat pattern" and more follow-through rallies will allow the price to test the previous highs in the near term. In terms of trading strategy, buying the dips is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.0900

Target Price: 1.1184

Stop Loss: 1.0800

Valid Until: 2022-07-10 23:55:00

Support: 1.0868, 1.0844, 1.0820, 1.0805

Resistance: 1.0905, 1.0923, 1.0958, 1.1000