The euro is in negative territory on Thursday and has pared most of this week’s gains. EUR/USD is trading just above the 1.05 line in the European session, down 0.58% on the day.
German, eurozone PMIs soften
Today’s German and eurozone PMIs indicated slower activity in May, which reflects weaker economic activity. Manufacturing and Services PMIs in both Germany and the eurozone weakened, although they still pointed to expansion, with readings above the neutral 50.0 level. Nevertheless, the releases are a cause for concern. As the largest economy in the eurozone, Germany is a bellwether for the bloc. With the outlook for the German economy looking gloomier, it’s a bad sign for the rest of the eurozone.
The German economy has been hit by a fall in exports, and high inflation and economic uncertainty have hurt domestic demand. Businesses are more pessimistic about the economic outlook, pointing to the war in Ukraine, supply disruptions in China and higher prices. The latest setback is that Russia is decreasing its supply of natural gas to Germany, raising fears that Germany may run short of natural gas in the winter. This has prompted German to enter Phase 2 of its three-stage emergency gas plan.
The euro has taken a tumble and EUR/USD is down over 550 points since Apr. 1. The slow response of the ECB to spiralling inflation hasn’t helped, as the ECB is yet to embark on a rate-tightening cycle, while the Fed has been raising rates and delivered a mammoth 75-bps hike last week. This has widened the US/Europe rate differential and sent the euro lower. Unless US yields fall, the euro is likely to continue losing ground.
EUR/USD Daily Chart
- EUR/USD has initial resistance at 1.0612, followed by resistance at 1.0727
- EUR/USD tested support at 1.0485 in the Asian session. Below, there is support at 1.0370