Eurozone’s outlook darkens further

The USD edged higher against its counterparts yesterday for a fifth day in a row as the market’s attention increasingly turns towards the Fed’s interest rate decision tomorrow as another 25 basis points rate hike is expected, yet the bank is also expected by the market to remain on hold throughout the year after that. AUD/USD was on the rise over the past twenty-four hours and is currently testing the 0.6770 (R1) resistance line. The downward motion of the pair seems to have been interrupted, hence we tend to switch our bearish outlook in favour of a sideways movement bias initially, yet there seem to be some bullish tendencies for the pair. Please note that the RSI indicator rose and reached the reading of 50 implying a rather indecisive market for now. Should the bulls take over we would expect the pair to break the 0.6770 (R1) resistance line and aim if not breach the 0.6835 (R2) resistance level. Should on the other hand the bears be in charge of the pair’s direction, we may see AUD/USD breaching the 0.6700 (S1) support line, aiming for lower grounds.

US stock markets sent some mixed signals yesterday as despite Dow Jones and S&P 500 being on the rise, Nasdaq remained relatively unchanged. Market focus in US stock markets is expected to shift towards the release of the earnings reports of big tech companies, with Microsoft (#MSFT) and Alphabet (#GOOG) delivering their reports today in the after-market hours and are to be followed by eBay (#EBAY) and Meta Platforms (#META) tomorrow and Intel Corporation (#INTC) and Amazon (#AMZ) on Thursday among others.

Back in the FX market we highlight our worries for the economic outlook of the Eurozone, after the release of July’s preliminary PMI figures, which showed a contraction of economic activity, even deeper this time. It’s characteristic that the spearhead of Eurozone’s economy, Germany’s manufacturing sector had the lowest reading since May 2020 at the beginning of the pandemic. It should be noted that the German auto industry seems to be getting strong competition regarding e-vehicles from abroad, while the lack of specialised workforce and unrest among existing employees and high energy costs make the situation even worse. In addition to that, we have also to take into account ECB’s hawkishness, which has raised the refinancing rate by 400 basis points in the last eight months and is expected to hike rates on Thursday and then again possibly in September. The tightening of ECB’s monetary policy, which aims at curbing inflationary pressures in the Eurozone, is expected to weigh further on economic activity as the financial environment of the Eurozone is to become even more strained, especially given that high rates are to be maintained for a longer period according to ECB officials. Overall, we see the case for the Eurozone’s economic outlook darkening which may weigh on EUR.

EUR/USD continued to move lower yet seems to have stabilised somewhat between the 1.1020 (S1) support line and the 1.1175 (R1) resistance line. We tend to maintain our bearish outlook for the pair as long as the downward trendline guiding the pair since the 18 of July remains intact. Furthermore, we note that the RSI indicator remains near the reading of 30 implying a strong bearish sentiment of the market for the pair. Should the selling interest be extended, we may see the pair breaking the 1.1020 (S1) support line with the next target for the bears being substantially lower, namely the 1.0885 (S2) level. Should a buying interest be expressed for the pair, we may see EUR/USD rising, breaking the prementioned downward trendline and signalling an interruption of the downward movement, aiming if not breaking the 1.1175 (R1) line.

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Today note the release of Germany’s Ifo indicators for July, UK’s CBI business optimism for Q3 and trends for industrial orders for July and the US consumer confidence for July and the weekly API crude oil inventories. During tomorrow’s Asian session, we note the release of Australia’s CPI rates for Q2.