Slowdown in Europe’s economy forces EURUSD to decline

23 August 2023 180
Slowdown in Europe’s economy forces EURUSD to decline

The EURUSD currency pair continues Tuesday’s strong decline during today’s trading session. The prices broke through the support level at 1.085 and fell to the new 2-month lows. If euro buyers fail to seize the initiative by the end of the day, EURUSD could decline to the May-June lows in the range of 1.068-1.075. Fundamentally, there are clearly more chances for a continuation of the fall now than for a rebound.

The reason for a massive sell-off of the euro and purchases of the dollar was today's data on business activity indices in the EU. The European services sector showed a sharp drop in performance, with its PMI fell from 50.9 to 48.3 and was significantly worse than expectations of 50.5. The business activity fell below the critical level of 50 points for the first time since January.

At the same time, the EU's largest economy is experiencing an even deeper downturn. Business activity in Germany fell from 48.5 to 44.7 points. This is the lowest since May 2020, when the first wave of the Covid-19 pandemic was at its peak. Similar to the situation with the pan-European indicator, analysts' forecasts were much more optimistic, suggesting only a slight decline in the PMI to 48.3. However, the reality turned out to be much gloomier.

The EU business community indicates continued interest rate hikes, high inflation and weakened consumer demand. Although there is a slight improvement in the industrial sector, where the PMI rose from 42.7 to 43.7, it does not help the cause, as the indicator still shows declining business activity. As a result, the probability of interest rate increases by the ECB in September dropped from 60% to 40%. This is another factor in favor of a deeper fall in EURUSD.

After breaking through the level of 1.085, EURUSD prices have no significant support up to the range of 1.068-1.075. It is highly likely that bears will move the price in this direction. The downside scenario will be canceled if prices return above the level of 1.085.

The following trading strategy may be offered:

Sell EURUSD for the current price. Take profit – 1.075. Stop loss – 1.085.

Traders may also use the Trailing stop instead of the fixed Stop loss at their discretion.

This content is for informational purposes only and is not intended to be investing advice.

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